For buyers and sellers of reinsurance, Baden-Baden is a vital point in the calendar—it’s usually when discussions over renewals get serious. After the recent floods in northern Europe, there’s currently more than the usual uncertainty about the outcomes of the negotiations.

VIG Re brings a unique perspective: it attends as both parties to the negotiations. The Czechia-based business is a reinsurer in its own right, and a cedant as the buyer for the wider Vienna Insurance Group (VIG), one of the largest international insurance groups in Central and Eastern Europe.

For Johannes Martin Hartmann, chief executive officer and chairman of VIG Re, there’s no conflict. “We have a common interest on both sides,” he told the 1.1 Club, Intelligent Insurer’s online, on-demand platform for one-on-one interviews with industry leaders.

“We play it very much as a partnership that’s long-term focused. As buyers or sellers of reinsurance, we don’t want to be hopping on and off the programmes. We always have to come to fair terms which should respect the proper pricing of the risk,” he said.

The central question is what that “proper pricing” looks like today.

A watershed

On one hand, the key discussion at Baden-Baden should be clear—and a clear break from 2020.

“COVID-19 was the big topic last year but it does not look as though it will make the headlines this year. The industry has found how to cope with that,” said Hartmann.

“Today, it’s very much about natural catastrophes and secondary perils—if they are properly modelled and priced. That will be the big discussion in continental Europe this year.”

It won’t preclude other topics: cyber insurance, particularly contract certainty about exposures, and political risks, with Black Live Matters riots and civil commotion in South Africa, will also feature. However, the flooding in Germany and Belgium could be a turning point for Europe.

“It’s unprecedented because in the past the European market has been quite successfully detached from international prices. When prices went up after events in Florida or in Japan, Europe was not really affected. This is the first time in a long while that it has had massive losses,” Hartmann said.

One impact of that, he suggested, may be that while discussions intensify during Baden-Baden, decisions remain some way off.

“We see reinsurers holding back quotes because nobody wants to make the first move and also high uncertainty on the buyer side as to the impact on the programmes—will they buy more; will they buy less?” he explained.

“There’s a lot of uncertainty about where we are heading. It will be very interesting, and also I believe a very late renewal—until a common opinion is clear in the market.”

The missing ingredient

Whether it’s set to be a hard market in Europe remains uncertain. It’s helpful, according to Hartmann, to look at three classes of programmes.

First, there are those in Germany and Belgium that have, as he put it, “been smashed to pieces”.

“They were designed for winds, winter storm or earthquake, and secondary perils have completely eroded the cover not only vertically but also horizontally,” he said. These programmes can expect discussions both on capacity and pricing—and “can expect quite significant price adjustments because it has not been properly priced in before”.

Others have been partly affected but not hit hard. They again will see some, more modest, adjustments to pricing on a case-by-case basis. “It will very much depend on the performance of each contract,” he said.

Finally, there are those who have been untouched. “The toughest point will be programmes that have not been affected at all by the losses this year,” he explained. France and some other countries have had a benign nat cat performance, but following the German flooding, reinsurers may just see that as good luck, he said.

“It could easily also happen elsewhere, but will these clients be prepared to accept that since other European markets suffered losses, they also have to pay for that?”

He added: “If that happens, then it will truly be what I call a hard market—where programmes that have not been affected by the losses see rate increases anyway.”

Whether it will happen remains uncertain. Hartmann notes that most of the ingredients needed for a hard market are present: there’s been an increase in nat cat activities and a reappraisal of models, which traditionally made European risks look attractive. There’s also pressure on the investment income with inflation picking up, too.

“Most importantly, the reinsurers have not really made money since 2017,” Hartmann added. “A lot of factors would point towards a need for market hardening.”

However, one factor is missing: a lack of capacity. “If you look at the capitalisation of the reinsurance industry, it’s very comfortable. Even after the events we’ve seen this year, it’s not eroding capital,” he said.

“None of the reinsurers we talk to says they have to scale down and reduce their appetite. Everybody’s saying they have the capacity, but you have to pay the right price.”

For now, that may mean that Europe continues to buck the trend. “It’s difficult to achieve a market hardening if reinsurers will not, in the end, walk away and say they’ll just reduce the capacity,” said Hartmann.

“So far, I don’t see these signs of that.”

To view the full 1.1 Club interview click here

Image courtsey of Shutterstock / Anton Watman