Major reinsurers hope for light to moderate reinsurance rate increases in January

This week see’s the global reinsurance industry meet up in Monte Carlo in the south of France for the annual Rendez-vous de September event. At this key industry meeting, executives from the world’s largest reinsurers and brokers meet with each other and with some clients to discuss industry trends and the outlook for reinsurance rates and pricing at the January renewals. Some of the largest reinsurers in the world are continuing to push for slight increases at the renewals, but generally the rate landscape is predicted to be more stable.

Swiss Re predict that external factors will help to continue an upward shift in pricing. Swiss Re says that the focus on solvency is making economic capital of reinsurers more important and helping to drive reinsurance pricing, while pressure on investment turns from low rates will also contribute to a desire to keep pushing for rate rises. Swiss Re expects prices to increase moderately, and says that it is prepared to support its clients on a sustainable basis while also being ready to deploy capital to areas that offer the most attractive returns.

Swiss Re Group CEO Michel M. Liès commented;: “Our industry is facing a particularly turbulent economic and financial market environment. But our strengths as a well-capitalised company with unique expertise in underwriting and a demonstrated track-record in developing innovative solutions mean we are well placed to support them.”

Swiss Re’s CEO of Reinsurance, Christian Mumenthaler, said;: “Upwards pressure on prices for (re)insurance is likely to rise, as low interest rates continue to depress running yields and drag return-on-equity (ROE) levels down, significant reserve releases will not go on forever and solvency rules are tightening all over the world. In addition, re/insurers’ IFRS or US GAAP capital levels may appear inflated in an environment of falling interest rates due to the build-up of unrealised gains; this does not reflect economic capital levels.”

For the upcoming January renewals, Swiss Re remains positive and expects to see increased demand for natural catastrophe frequency protection covers and capital relief transactions. Both of those goals can be achieved through the use of alternative reinsurance structures such as aggregate protections perhaps via catastrophe bonds, so it could be interesting to see whether the cat bond market can pick up any additional business. Swiss Re also said that they expect demand for external run-off transactions to increase.

Munich Re highlights some of the difficulties faced by reinsurers, citing capital markets uncertainties and continuing historic low interest rates. They warn that challenges are likely to continue for reinsurers in the coming year despite insurers and reinsurers having strong capital reserves. The Eurozone crisis continues to throw a dark cloud over the prospects for the industry, and with the low rate environment impacting investment returns, business has rarely been more challenging. Given this challenging business environment for reinsurers, Munich Re says that the 1st January renewals are especially significant this year.

Torsten Jeworrek, Munich Re’s Reinsurance CEO, said; “More than ever, our industry faces the challenge of achieving stable earnings in its core business and further reducing its dependency on the investment result. The key question will be how quickly and to what extent insurers and reinsurers will succeed in factoring the low interest-rate level into their price calculations.”

Munich Re expects prices, terms and conditions will remain ‘largely stable’ at the January renewals. They expect natural catastrophe business to be largely stable too, unless there are any major loss events between now and January. They highlight European windstorm as an area that could rise, if claims expectations rise due to rate adjustments on natural hazard models. In casualty classes if business Munich Re feels this will begin to stabilise but with a trend towards slight upward increases. Munich Re says that general improvement in insurance prices in the U.S., as well as in motor liability business in Europe, should impact positively on reinsurance rates.

Jeworrek added; “Our business is founded on Munich Re’s financial stability, i.e. its reliability in terms of settling claims today and in the future. On this basis, we offer our clients – also in troubled economic times – risk transfer solutions that provide relief and spur their business. For this, however, we need risk-commensurate premiums that reflect the economic environment.”

Finally, Hannover Re said that after pleasing reinsurance treaty renewals in 2012 they are looking ahead with confidence to the 1st January renewals. They expect reinsurance prices to rise further at the upcoming renewals, saying that while they expect the risk adequacy of rates to be maintained further price rises should be attainable.

“We were pleased with the outcome of our renewals in April and in June/July. Along with the favourable development in global property (catastrophe) lines, we are now seeing the first positive signs – including in the United States – of an improved climate overall in the casualty lines. We are confident that this trend will continue in the treaty renewals as at 1 January 2013”, Chief Executive Officer Ulrich Wallin commented.

Hannover Re continues to see stable or rising demand for reinsurance cover which they say is being driven by a growing concentration of values in urban conurbations, this is a particularly key factor that has the potential to keep rates following a steady upward trend, as well as by the implementation of risk-based solvency systems (such as Solvency II in Europe).

Interestingly, Hannover Re also expect factors that have already driven reinsurance rate increases to continue to exert influence. They said that the adjustments made to natural catastrophe models as well as the low interest rate environment will again have a favorable effect on treaty pricing at 1st January. To this end Hannover Re want to aims to expand their market share where rates are attractive and maintain them where rates are more stable.

Hannover Re also confirmed their commitment to capital market risk transfer via catastrophe bonds. “We are currently renewing our ’Eurus‘ transaction with a volume of EUR 100 million”, Mr. Wallin explained. “Eurus III provides coverage for severe windstorm events in various European countries over the next four storm seasons.”

A factor that none of these major reinsurers has mentioned is whether there is another influx of capital into the reinsurance convergence sector in the coming months. This could put additional pressure on rates and add to the competition they will be feeling on certain high-percentage lines of business. The January renewals will be key this year, both for reinsurers seeking to maintain profitable business channels and for convergence reinsurers and the cat bond market who will be seeking to disrupt the traditional carriers where profitable.