(Bloomberg)—Reinsurers may fail to increase rates they charge primary carriers for their backstop coverage when they begin price talks for 2014 in Monte Carlo this week.
“I expect the market staying flat to ticking down, on the absolute premium,” Amer Ahmed, CEO of Allianz Re, the reinsurance arm of Germany’s Allianz SE, told Bloomberg News on Sept. 3 in Munich. “It will be interesting to see if there will be a slippage in terms and conditions.”
Reinsurers are under pressure to shore up earnings hurt by disaster claims and low interest rates. Reinsurance rates fell in seven of the last 10 years, according to the Guy Carpenter World Property Catastrophe Rate on Line Index. While remaining stable in January and April, there was renewed “downward pressure” at the June and July contract renewals, said Guy Carpenter, the reinsurance brokerage of Marsh & McLennan Cos.
Reinsurers will meet with brokers and primary insurers, whom they help shoulder risks for clients in return for a share of the premiums, in Monte Carlo starting tomorrow to begin negotiating next year’s property and casualty policies. Talks will continue next month in Baden-Baden, Germany.
Munich Re, Swiss Re Ltd. and Hannover Re are among reinsurers typically renewing about two-thirds of their annual property and casualty contracts in January. Munich Re, the world’s biggest reinsurer, said on Aug. 6 prices declined 0.9 percent in the July renewals, while Zurich-based Swiss Re, the second-biggest reinsurer, reported a drop of 5 percent.
Paul Horgan, head of group reinsurance at Zurich Insurance Group AG, Switzerland’s largest insurer, said at the round table of industry executives hosted by Bloomberg that he expects a “trade-off of price terms and conditions” in Monte Carlo after observing “some extensions” in July renewals.
“Prices in a number of areas are below where they should be,” Manfred Seitz, managing director of international reinsurance at Warren Buffett’s Berkshire Hathaway Inc. told executives in Munich “It’s a buyers’ market, there is a large number of providers and a lot of capital looking for returns.”
Standard & Poor’s Ratings Services said this week that unless there is a market-wide disaster with significant losses, it expects lower earnings for reinsurers in the coming years. Excess capital “will continue to put downward pressure on pricing, or at least prevent any significant increases,” the ratings firm said.
The reinsurance industry had capital of $510 billion at the end of June, just below a record $515 billion three months earlier, according to Aon Benfield, the reinsurance broker of Aon Ltd., which mediates deals for primary insurers.
While these buffers are used as a cushion against natural catastrophe losses, the surplus of funds means primary insurers such as Allianz and France’s Axa SA can demand lower prices on reinsurance policies to limit losses when disasters strike.
“I’m not a believer that we are overcapitalized as an industry,” Berkshire’s Seitz said. “A $100 billion industry loss, which is a conceivable figure, would mean you lose 20 percent of the industry capital.”
Inflows have been driven by new entrants, such as hedge and pension funds, and the increased sales of insurance-linked securities, or ILS, such as catastrophe bonds, which allow reinsurers to tap interest or principal payments when losses from specific events surpass an agreed-upon threshold.
Annual catastrophe bond issuance reached $6.7 billion at the end of June, bringing bonds currently active in the market to a record $17.5 billion, Aon Benfield said in a report.
Zurich’s Horgan said there’s “a lot of capacity and a lot of players looking to maintain or grow their lines,” calling it a “very tough dynamic for all of us.”
“I was somehow shocked to see the growth in insurance- linked securities over the recent months,” said Niklaus Hilti, who helps oversee more than $5.3 billion in assets as Zurich- based head of insurance-linked strategy at Credit Suisse Group AG, the second-biggest Swiss bank.
For Allianz Re’s Ahmed, it remains to be seen how capital markets perform as an alternative risk-taker to traditional reinsurance in “another Katrina-type magnitude loss,” referring to the hurricane that sparked record costs in 2005.
“We can go to our traditional reinsurers, who will have cover most likely available because there is a reinstatement in place and even beyond,” he said. “But how will capital markets and ILS investors react when we are still in the hurricane season and I’m bare because it’s not in seven days that you are going to have a new catastrophe bond in place?”
Reinsurers’ catastrophe claims usually increase in the second half of the year with the onset of hurricanes. The June- through-November U.S. hurricane season hasn’t resulted in any major claims so far this year, with insured losses of more than 3 billion euros ($3.9 billion) tied to floods in southern and eastern Germany the most expensive so far, Munich Re said.
By comparison, Hurricane Katrina caused insured losses of $62 billion in 2005, with the Japanese earthquake and tsunami costing $40 billion six years later, the two costliest disasters for the industry to date, according to Munich Re.
An increase in claims from natural disaster was part of the reason why Munich Re last month reported a profit drop of 35 percent for the second quarter from a year ago. Swiss Re had its first quarterly underwriting loss since 2011 in that period.
While lower claims for natural disasters typically leave reinsurers less leeway to push through price increases, Credit Suisse’s Hilti agrees the focus should remain on risks covered.
“In the past, the big losses were always those that couldn’t be captured in a formula, such as the World Trade Center or the flooding that caused most claims when Hurricane Katrina hit,” he said. Still, “pricing is quite an insignificant driver of long-term profitability of the business because it’s much more about the extent of the coverage.”
Register or login for access to this item and much more
All Digital Insurance content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access