Transparency is crucial for this year’s 1/1 negotiations, according to NewRe chief executive officer Thomas Braune, as capacity shortages, inflation and a wave of wider uncertainties have hit the reinsurance market.

“Capacity and inflation are the big topics,” he told Monte Carlo Today. “There’s a shortage of capacity depending on the line of business and also on the frequency-related covers. That’s because they are more exposed to the uncertainty of inflation.”

Because inflation is all about the price it is dependent on each market, each line of business and each client, so the discussions are already “very specific” for brokers as well as clients, and include questions about the kinds of assumptions being made.

“Do you anticipate upcoming inflation or do you reflect the inflation so far? We’re asking this in our discussions because the macroeconomic forecasts show that peak inflation has not yet been achieved. Therefore it’s our approach to anticipate this because if you can foresee an uncertainty then it always has a price. So we must reflect it in our underwriting,” Braune explained.

He said that the property portfolio is mainly a catastrophe excess of loss portfolio, so construction prices are key for this business.

“Here you see a large deviation between general inflation and the construction price inflation. One example is Germany: the construction price index is currently 18 percent and general inflation is around 9 percent. Of course, it’s different in every country.”

NewRe is not engaged in specialty lines, but Braune said: “What I hear in the market is that in particular the capacity for specialty lines is shrinking.”

He added: “Casualty is not the major topic of discussion yet, but the message for us is clear. We have grown significantly over the past years, now we are consolidating. The relatively low margins, from my point of view, do not fairly reflect the current uncertainty so it’s time for us to consolidate."

Braune said there hadn’t been many surprises during his pre-1/1 discussions at Monte Carlo, but he did say “sometimes clients talk only about relatively low single-digit inflation” and he added: “I see it as the starting point of negotiations.”

What is transparency?

Commenting on a broader approach to negotiations he said: “Transparency is key this year because there is so much uncertainty. What does transparency mean? We ask clients how they reflect inflation in their original policies.

“Transparency is sometimes about the definition, so we had discussions about the definition of storms.

“Wherever it is in our hands as an industry to reduce uncertainty we should do it now because there is enough uncertainty outside.”

For NewRe, Braune expects that there will be several rounds of discussions ahead of 1/1.

“At the moment brokers are looking for capacity for their clients as they’ve promised their clients will have enough capacity. Then it’s up to clients to rethink their programmes depending first on the capacity and then the frequency of exposed lines.

“They may have to adjust if they do not get enough capacity for certain covers or layers, for example.”

Given this situation, he said he could imagine that there will be more structured solutions for the more frequency-related covers. “Because what I’m hearing is that most of the reinsurers don’t really have appetite for those.”

Baden-Baden is the “next point of truth” for 1/1 negotiations, he concluded.