EDITOR’S LETTER

Back in Baden: but are reinsurers’ crystal balls accurate?

“COVID-19 proved that unexpected shocks still make the market move.”

For those who have travelled to Baden-Baden this week, it is good to be back. Good to meet clients, peers, colleagues and acquaintances in person; good to travel; good to shake hands; good to eat and drink together again.

It will not all be completely normal, of course. COVID-19 restrictions remain in place. The event will be much smaller, the town much quieter than usual. But the Kongresshaus, The Kurhaus, Leo’s and the Casino Bar will all feel familiar and nostalgic this week—and we only missed a year!

In many ways, Baden-Baden epitomises the spirit of the reinsurance industry more than some of the other conferences. There is less posturing than at the Monte Carlo Rendez-Vous and it is less formal than some of the industry’s true conferences, with the staging and speakers, the ceremonies and breakout rooms. For the most part, it feels like old friends getting together and doing business based on trust.

This is what the industry was built on, of course. Long before decisions on appropriate counterparties were determined based on the opinions and data from everything from Solvency II and rating agencies to cloud-based capital management tools, the industry did business just like this. They met, reaffirmed relationships and trust, and got on with it.

Supply and demand

It is for the better that those decisions involving vast sums of money and risk transfer are now based on more than trust alone. Yet the nature of the negotiations remain remarkably similar to what has gone before. For all the complexities in the market right now, two fundamental factors will drive discussions around price: losses and capacity.

These factors are themselves fundamentally reflections of the most basic business dynamic of all: supply and demand. The funny thing in reinsurance is that it can indeed get out of kilter. Even stranger, it can stay that way for long periods of time. Reinsurers call that situation a soft market; cedants, at a different point in the cycle, call it a hard market.

You might think that with all the technology and sophisticated modelling techniques now being used, the correct price for a risk could be established more accurately—and the cycles would cease. Yet COVID-19 proved that unexpected shocks still make the market move, as do severe losses and uncertainty. The market is grappling with all of those things at the moment—they will all play a role in negotiations.

Perhaps what has changed compared to previous years is the growing sense that perhaps the way some risks have been priced is now fundamentally wrong—and the price inadequate. Most risks are priced on the basis of historic data. But what if the data is no longer applicable to the future nature of that risk?

There are several reasons reinsurers might think that, and three of them begin with C: climate, COVID-19 and cyber. Above all, that will be the toughest part of negotiations this year. Asking for rate increases based on past experience is hard enough, but doing so using a crystal ball could prove impossible.

Wyn Jenkins is the managing editor of Intelligent Insurer

Image: shutterstock.com / Love Solutions