Baden-Baden Symposium: 1.1 talks must go beyond pricing as loss creep concerns mount

The reinsurance industry should not be solely focused on price and must pay greater attention to the sector’s value proposition during renewal discussions, industry leaders warned at the Guy Carpenter Baden-Baden Reinsurance Symposium on Sunday.

Addressing a packed-out auditorium at the Kongresshaus in Baden-Baden, Guy Carpenter’s CEO of EMEA and global capital solutions Laurent Rousseau urged the industry to move away from such a quantitative view of risk.

“Something very close to my heart is the difference between price and value. As insurers, reinsurers and brokers, we focus on the price of risk,” he said.

“Very often, we tend to lose the bigger picture. What is the value that we bring to society? Take education, health, identity – in the name of those values, a number of economic stakeholders are ready to step up and accept some risk at the economic price. I just hope that in Baden-Baden we will have good negotiations.”

Rousseau continued that he “does not buy into the idea” that uncertainty has never been so high, although he did acknowledge that there are new risks in the form of AI and annual natural catastrophe losses regularly exceeding $100bn.

Panellists addressing the 600-plus industry executives at the event, hosted in partnership with The Insurer, agreed that the industry is facing new and evolving risks as well as issues around loss creep from natural catastrophe losses and the impact of inflation on portfolios and industry exposure.

Also speaking on the panel, Swiss Re CEO Andreas Berger warned on the increasing impact of secondary perils on overall industry losses and issued a stark warning on the “stress” being caused by loss creep. As an example, he pointed to recent severe convective storm losses in northern Italy. He said that while early estimates pegged losses from the storms at $2.2bn, recent figures published by insurers indicate the loss is closer to $6bn “or even higher”.

“The biggest topic that we need to address is the fundamental issue about loss creep,” he said.

“It basically boils down to detailed quantification of exposures, understanding of the exposures. Our models need to be adjusted and we still work with outdated assumptions in our costings, and that's something that we really need to address very quickly, jointly together, because this is causing stress in the system.”

GB Taglioni, partner in Oliver Wyman’s insurance and asset management practice, highlighted that the current point in the reinsurance cycle presents a moment to react.

“We are seeing shifts in the industry so that change is the only constant. At this moment in time, we need to react to remain relevant,” said Taglioni. “The speed of change and the speed of innovation can be much faster.”

The cyclical nature of reinsurance formed part of the underlying theme of the Symposium, with this year’s event focused on “Partnering through crises, shocks and cycles”.

Rousseau described crises and shocks as “the raw materials” of reinsurance business, although he warned that partnerships is an often overused term for what are nothing more than transactional relationships.

“Actually, partnership is a choice, and one you keep making every day,” he said. “The most intuitive way of looking at the reinsurance cycle, and how incumbents see their role in the cycle, is by very simply looking at the capital base of reinsurance.”

Rousseau highlighted the sector’s strong capitalisation over recent years, noting that a greater proportion of capital is now derived from financial markets through ILS transactions rather than a distinct class of new entrants.

He added that in the debate around partnerships across the cycle, the return on equity of listed reinsurers in 2023 indicated that a balance has been struck.

“Following the knee-jerk reaction at the 1.1.23 renewals when insurers increased attachment points, restructured programs and increased prices, their returns have increased tremendously,” Rousseau continued.

“In the meantime, insurers’ returns have inevitably decreased. Essentially, we have this point now of seeing how quickly this will happen for them as we slow down. So as we go together, it really shows that there has been a balance in the cycle.”

Also commenting on the theme of the Symposium, Roland Oppermann, member of the board at SV SparkassenVersicherung, said the industry must focus on building strategic partnerships and promote industry collaboration to tackle the increasing complexity and scale of the risk environment as well as growth.

Oppermann stressed the importance of insurers, particularly regional and specialist players, forging long-term partnerships with reinsurers and intermediaries and highlighted the role both parties play in enabling primary carriers to grow and develop into new products and new markets.

“The reinsurers and brokers are our door to the international world,” he said.

“How can we receive new ideas, product ideas? This is only through reinsurers and through the brokers. Therefore, they have an important role in this business to transport the knowledge we receive.”