In an interview with Bloomberg, Amer Ahmed the CEO of Allianz Re said that some reinsurance rates are reaching unsustainable levels which, if prices continue to decline, may cause his firm to buy more reinsurance and sell less.
Ahmed was interviewed by Bloomberg in Munich and discussed the reinsurance pricing issue and whether it was approaching a floor where rates might stabilise in 2015. Ahmed said that rates may stabilise in 2015 and it looks like the market is approaching a point where, for some lines of reinsurance business, the economics will soon no longer make sense.
Ahmed told Bloomberg; “Our assessments show that rates in some parts of the market are reaching a level where they don’t seem sustainable and don’t justify the risk-reward.”
He explained that at the recent January reinsurance renewals some programs had to be re-priced in order to get reinsurers to allocate capacity to them. “That shows that we are reaching a point where economics prevent further significant price reductions,” he continued.
Looking ahead, Ahmed said that the mid-year renewals will be telling and that depending on the downward trajectory of rates could mean Allianz buys more reinsurance for itself.
The expectation is that rate declines will slow down, according to Ahmed, but if “rates continue to fall significantly this year, we would consider buying more reinsurance than we did in the recent past and likely sell less.”
This has been an expectation for some time, that the reinsurance market may reach a point where pricing is so attractive that a sudden uptick in reinsurance buying is witnessed. In recent years large insurers have been rationalising their reinsurance purchases, combining programs and often effectively buying less cover.
This could change and insurers and reinsurers may find the market so conducive for buyers that they choose to ramp up their protection and lock it in at the most attractive terms and pricing seen for years. Ahmed noted the trend towards multi-year covers which shows some buyers thinking in this way.
If reinsurance rates do continue to decline there will come a point where, in order to best serve their shareholders, buyers of reinsurance programs should be ramping up their purchases and locking in as much cover as cheaply as they can, with the best terms for the longest period possible.
If we do see this reversal in buying trends it could provide another opportunity for the ILS and catastrophe bond sector to greatly increase its penetration of traditional reinsurance.
The mid-year reinsurance renewals look set to be all about price once again but, with pricing approaching unsustainable levels for some traditional players, the cost-of-capital could be even more key and those with lower-cost third-party reinsurance capital to deploy (such as ILS fund managers) could find they have an advantage.
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