Baden-Baden in 7 P's

Just back from the Baden-Baden 2022 edition that was remarkable in many ways. It was the hottest Baden in my memory (also in terms of temperatures) and we had torrential rainfall in the mix that led to flooding (a nice reminder of this secondary peril’s existence). Also, it was my first attendance with our Inwards Team next to the (usual) Ageas buying team. Here my summary of what the discussions were about – in “7Ps”.?

Product: It is obvious that the reinsurance market is pushing for corrections in the way the industry designed its products over the last year. With appetite on FGU Aggregate covers becoming very rare, we observed an overall push from carriers to have CAT programs designed to protect capital rather than earnings. This translates into suggestions to have first layers attaching at 1/6 to 1/10 years return periods (depending who you ask) for all perils, significantly up. I guess for the industry this means on average an increase of retention by 50-150%, depending on the territory. Some discussion emerged around second event products that might attach lower, eg. RPP products.?

Paid: There seems to be a consensus under sellers that reinstatements shall be paid. This is one of the most common requests I got from reinsurers, when considering structuring. Some reinsurers taking a hard stance there, saying they would not quote pre-paid reinstatements. Overall, we feel some pressure also on the number of reinstatements, as it seems reinsurers are in a somewhat difficult spot to manage their annual aggregate capacity next to their OEP budgets. Interestingly, some large buyers told me privately that this is a “battle” they would be picking for this renewal.??

Price: Obviously, also price was discussed in Baden. Not like during previous editions, where we could discuss actual pricing for the placements, but rather in principle terms, ie that a serious repricing is necessary across geographies. Repricing (other than last year) would have to start after the application of inflation and other risk adjustment metrics, and it would have to be significant. I heard this for CAT lines, property lines, but also motor and casualty lines. The talk is “as an industry, we were showing terrible CAT results for 5 years, we need sustainable rates that allow us to earn our cost of capital”. On that last one, obviously inflation and mounting interest rates do not help. The latter mechanically increase the cost of capital for the market. Besides the re-pricing, some reinsurers make it clear that sub 2% RoL Rate on Lines for windstorm dominated programs are a thing of the past.??

Plan: As in “no plan”. Some reinsurers are taking stock of their Ian losses and impact on their available retro capacity on the one hand and on their overall appetite on the other (the two often interlinked). Until this puzzle is solved and (maybe) some new retro capacity emerges, they don’t have a clear picture on where they stand for this renewal.?

Partnership: There used to be a lot of talk about partnership over the last decade or so during the Baden meetings. I very rarely heard this in this year’s conversations, as the conversations were more “if you want capacity on the CAT, I need diversifying business”. For personal lines players this is obviously a challenge, since CAT usually is the core purchase they do.?

Private: As in private deals. Some reinsurers are actively promoting private placements/layers “at their price” in order to support on the overall programs. We at Ageas find this troublesome in many ways. Firstly, there is a thin line between private placements and (hidden) differences in conditions (DIC). We believe, in today’s market, transparency and fairness to all reinsurers is more important than ever. And then secondly, pushing for systematic “private placements” will put those reinsurers in an asymmetrical loss position compared to the market (if a loss occurs of course). Post-loss, their payback requirements then will be diametral to that of the rest of the market, leading to dislocations and pre-programming conflict between those carriers and the affected market.?

Panic: No, there is no panic – but lots of concern. Concern on both sides: Reinsurers are (and rightfully so) searching for ways to return to sustainable levels of remuneration for the risk they take. Buyers, on the other side start to realize the many challenges this renewal will hold for them and prepare to have difficult discussions back home with their risk committees, their planning & budgeting teams and also local business owners.?

Keeping in touch with the market will be “the” key quality for both buyers and sellers. Personally, I believe some programs will come and go from the market without support, when they are out of line with the “2023 New Normal” (that is currently in the process of being defined). But then, I believe the same applies to reinsurers. We are all trading in a market and those reinsurers that try to push far beyond market consensus might find themselves in an odd spot: Not realizing the potential of the best priced European CAT market in many years.?

Is there a “P” that I forgot to mention? Any other observation you had, that should be in there??