Reinsurance giant Munich Re forecasts ongoing price pressure in insurance and reinsurance, leading the firm’s CEO Joachim Wenning to forecast that profits will remain stable, but are unlikely to return to levels seen in prior years.
Speaking to journalists at an informal meeting yesterday, Munich Re’s CEO said that he would forecast profits at around the EUR 2 billion plus level, as first reported by Reuters, which is aligned with where the company was targeting for 2017 before the major losses from recent catastrophe events.
Munich Re is only forecasting a small profit for 2017, after it suffered major losses due to hurricanes Harvey, Irma and Maria, as well as the Mexican earthquakes and California wildfires.
While the insurance and reinsurance world are predicting rate increases following these loss events, Munich Re itself said that it was “expecting a significant market recovery.”
The reinsurers CFO said recently that, “We expect prices to rise again in the forthcoming negotiations – particularly in the markets that have been hardest hit by recent natural catastrophes.”
But the reinsurer is not expecting these to make a great deal of difference it seems, with CEO Wenning saying yesterday that pressures due to interest rates and low pricing are expected to continue, making profit growth harder to come by.
Wenning did say that price increases could speed up profit growth, but at this time the company does not seem particularly bullish on the prospects for rate rises driving much higher profitability, at least in the short-term.
This likely reflects the understanding that as rates increase more capital is inevitably going to flow into the reinsurance market, which could stop rate rises in their tracks at renewals further into the future.
“We won’t see big jumps back to previous earnings levels,” Wenning told the assembled journalists, so shareholders should likely not expect a return to the profit levels of EUR 3 billion and more experienced just a few years ago (EUR 3.3 billion in 2013 for example).
Rather it seems Munich Re is preparing itself and the markets for a future where EUR 2 billion or greater is seen as an attractive profit, which it certainly is.
One of the benefits of lower profits for the reinsurance giants could be that they are less able to accumulate excess capital so quickly and their capital management actions may help to stem further pressure on rates somewhat as a result.
However the interest that continues to be shown by institutional investors to access reinsurance returns and the continued growth of ILS may counterbalance that, meaning pressure remains on prices.
The forecast for lower profits going forwards is another sign that reinsurers may struggle to earn back their losses, while the need for efficiency is set to increase.
For major global and fully diversified insurance and reinsurance platforms such as Munich Re this is unlikely to be a problem, but for smaller reinsurers and those focused on the competitive areas of the market, the fact the giants of the market aren’t forecasting a return to profits seen in the past could be seen as concerning.
For the capital markets, which can often accept a lower return for risks than some reinsurers, this could represent further opportunity for growth in the future, if the efficiency of capital and capacity becomes an increasingly important factor in reinsurance markets.
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