Reinsurers set to profit from rising rates despite string of disasters

by Artemis on May 10, 2011

You would be forgiven for thinking that the recent spate of catastrophes and natural disasters had left re/insurers sobbing quietly as they contemplated the prospects of an unprofitable year in 2011. That’s not the case though, as recent quarterly reports have shown many re/insurers predicting the return of rising reinsurance rates this summer.

Reinsurance rates rose straight away in some areas affected by disasters such as New Zealand, Australia and Japan. Reports suggest that rates have risen by as much as 30%+ in some property lines in Japan for example. Reinsurer Munich Re commented in their recent quarterly reports that they remain committed to targets, explicitly noting an opportunity to come in rising reinsurance rates which they believe will help them remain profitable in 2011.

Now Hiscox, the Lloyd’s of London insurer, has said that it expects significant reinsurance rate rises during the June and July renewals this year which will in turn have a knock-on effect to increase insurance premiums for businesses. Reinsurance rates are now back at the levels seen in 2010 especially in Asia and Hiscox expects them to rise, saying “We expect increases to become widespread during the June/July renewal period, with potential average rate rises of around 10% in the US catastrophe business.”

So re/insurers definitely have an opportunity to profit coming up if rates do rise as significantly as Hiscox suspects. The only thing which could dampen the excitement that rising rates can cause among reinsurers would be an active and damaging U.S. hurricane season with a number of landfalling storms. Granted, further catastrophes will inevitably cause the market turn to happen more quickly and rates to rise further, but a major hurricane hitting a U.S. city could wipe out all hopes of profit in 2011 for major reinsurers.

What about cat bonds? Well rising rates can help to make catastrophe bond pricing more competitive and attractive, particularly for primary insurer issuers. There is also the issue of retrocessional reinsurance cover which has seen price increases in recent years making it more expensive and helping cat bond issuance remain competitive. Cat bond prices and costs are under pressure anyway right now due to the way the market has stalled post-Japan quake and as it digests the ramifications of the new hurricane risk model, so given market conditions, reinsurance rate rises could serve to increase the attractiveness of cat bonds as a multi-year fixed cost source of reinsurance.

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