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In the German spa town of Baden Baden, all people could talk about this year, while sipping their spritzers, was New York Attorney General Eliot Spitzer.

Coming a week before this year's reinsurance gathering in Baden Baden, Spitzer's actions were the hot topic of conversation but had little impact on negotiations. However, it quickly revived recent speculative reports that Willis might be mulling a bid for bigger rival Aon, while the future of Marsh was questioned as its share price tumbled.

The initial response to Spitzer was that brokers will be forced to separate their primary and reinsurance activities in the future and that the impact of the probe will be felt most by the U.S. and London markets.

This is partly due to an innate conservatism in continental Europe towards changing traditional practices, but also because the relationship between the cedant and the reinsurer is often a direct one that does not involve brokers.

"The Spitzer action hovered over every conversation, but there was certainly no gloating," said Frank Rieder, vice president of New York-based broking group Cooper Gay Steele.

"It is not regarded as a Marsh problem but one that affects the whole industry and an issue that will affect the way we carry out business."

Willis announced during the week's negotiations that it was following Marsh in terminating the controversial market services agreements, also known as contingency agreements, which triggered the Spitzer action.

While Marsh indicated that the practice had been suspended, Willis went further and stated that it was to be permanently scrapped.

As might be expected, the impact of hurricanes Charley, Frances, Ivan and Jeanne plus typhoons Songba and Chaba in the Pacific featured in discussions.

Indications over the summer that catastrophe rates might soften by as much as 20 percent this year were disappointed by Charley and its successors, reports Holger Gaserow, managing director of Frankfurt-based Aon Rueck.

But while many delegates admitted that their company's third quarter earnings would be poor, the majority felt a strong first half meant their company's full-year figures were unlikely to be seriously off-target.

The world's largest reinsurer, Munich Re, put its own losses at around 500 million euros ($615m) at the beginning of October, but was sanguine about the effect on rates.

It said the resulting claims were not as severe as had first been supposed: "For the upcoming treaty renewals in reinsurance business, Munich Re expects the current level of risk-adequate prices and conditions to remain stable on the whole."

Gerald Koenig of GE Insurance Solutions said the focus was less on losses and more on the fact that four hurricanes had hit the same area in succession, which offered a challenge to the loss-modelling specialists.

"One single hurricane loss costing $20 billion would have made a much bigger and more immediate impact on the market than four making up the same loss, and would have sparked more discussion," said Frank Rieder. "But concern over the impact of climate change is very much more on the agenda. There is definitely a psychological impact on both buyers and sellers."

Discussions over security, which has often featured near the top of the agenda since Sept. 11, this year gave way to discussions over Converium's capital injection and withdrawal from the U.S. market as it reduces its book of business.

The process of evaluating security has become more complex, with brokers and buyers now subjecting reinsurers' balance sheets to intense scrutiny, and analysis is more sophisticated, said Rieder.

After the upsets at the start of the decade, the current market looks fairly stable on a capital basis, he added, although there is always the prospect of a heavy loss arising on a totally unforeseen issue that could turn the market around.

The new wave of Bermuda-based companies set up after Sept. 11, such as Axis, which now has a Zurich office, were much in evidence at this year's gathering as well. So was the market's oldest player, Lloyd's, which had a noticeably bigger profile this year.

Continuing the trend of recent years, this year's gathering also saw more Eastern European delegates, as privatization has opened the door to foreign companies and allowed the indigenous market to grow. "It's a developing and targeted area which is steadily becoming more sophisticated," said Rieder.

January 1, 2005

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