One of the side effects of the rich crop of results that is expected from reinsurers in a cat-free 2012 is that it will add to the downward squeeze on rates at the key 1 January renewals.
This was the prediction from Nick Frankland, the leader of Guy Carpenter's EMEA operations, on the eve of the Baden-Baden conference.
The gathering in the German spa town on the edge of the Black Forest is traditionally regarded as the end of the shadow boxing on rates that characterises the Monte Carlo Rendez-Vous in early September, as instead the gloves come off and reinsurers and cedants get serious about negotiating their 2013 treaty programmes. Click to enlarge
Although Frankland is too canny to give specific predictions on average rate movements, he believes the overall trend will be downward at 1 January, as bountiful reinsurance capital, combines with lower demand from insurers and 2012's remarkably gentle loss environment, to produce an environment where cedants have the upper hand in discussions.
And adding to the mixture are the strong results which reinsurers are widely expected to post, if the early riders in the current 3Q reporting season are anything to go by.
"If, as I suspect, the third quarter results are really good then I think reinsurers are going to struggle to look their clients in the eye and hold the line", Frankland told The Insurance Insider.
Last week, Platinum and Travelers' share prices both climbed to new, year highs, fuelled by impressive results. While the US insurance giant Travelers' delighted shareholders with news that it was continuing to drive through rate increases across its US commercial lines book, Platinum set the stall out for specialty reinsurers by revealing that its combined ratio for the first nine months of 2012 is a mere 75.2 percent.
"Reinsurers will be doing their absolute best to hold out as before and clients will start negotiations, by saying how much off".
"Of course it depends on the loss activity and history of individual accounts, but broadly speaking rates will be flat at best and more likely down, Frankland concluded.
Another factor is the level of capital in the reinsurance industry. Although there are a number of ways to measure it, they all point in the same direction - surplus. Guy Carpenter takes a strict measurement of "dedicated" reinsurance capital and last month revealed that it is at a new, all time high of $187bn. Traditionally, reinsurers are most consistent at driving through rate increases when capital is scarce.
Reinsurers' nerve will also be tested by insurers' continuing enthusiasm to restructure their reinsurance spend, typically with the consequence of buying less cover.
As The Insurance Insider reveals on page 1, Generali is widely expected to centralise its reinsurance spend for 2013, while across the Atlantic, American International Group is also in the throes of making major changes to its reinsurance buying strategy. Both are thought to be in the top ten of global reinsurance buyers.
Frankland wouldn't be drawn on individual accounts but he did agree that "a number of industry's significant major clients are retaining more at year-end."
"It's all adding to the downward pricing pressures at 1.1 because reinsurers will be desperately keen to ensure they maintain revenue elsewhere", he concludes.