The world’s largest reinsurance firm Munich Re has responded to the increased competition, high levels of capital and reduced rates in the reinsurance market by adjusting its portfolio at the key January reinsurance renewals.
In its fourth-quarter results statement, which Munich Re announced this morning, the reinsurer gave an update on the deployment of its reinsurance capacity at the key January renewals and recognised the continued pressure it faces from alternative reinsurance capital and increased competition.
Munich Re said it is satisfied overall with how the renewals went for the firm, but noted that the reinsurance market remains very challenging and that competition for signings became even stronger at the end of the year. Munich Re noted that inflows of capital from investors such as pension funds is increasingly being invested in alternative risk transfer instruments, such as catastrophe bonds, insurance-linked securities and collateralized reinsurance.
This interest from investors has led to ample capital in the reinsurance market, but is particularly affecting non-proportional natural catastrophe reinsurance business, said Munich Re. Given that this is a smaller part of the reinsurers January renewals the firm said that of more significance to it has been the increased price competition in the traditional reinsurance market.
Torsten Jeworrek, CEO of reinsurance at Munich Re, stated; “Munich Re has again succeeded in keeping its portfolio relatively stable. As ever, client proximity and solution orientation make us a valued partner. In a generally difficult economic environment, clients are seeking sophisticated reinsurance solutions for their capital and risk management.”
At the 1 January renewals just over half of Munich Re’s non-life reinsurance portfolio was up for renewal, representing premiums of €8.7 billion. Munich Re chose not to renew 12% (around €1 billion) of this business, saying that the business no longer met its profitability targets.
Instead Munich Re found other opportunities to deploy capital, underwriting €1.3 billion of new premium business, especially focusing on customised solutions to provide clients with capital relief. In tis way the firm was able to compensate for a lot of the lost business, which it had deemed unprofitable to continue to underwrite.
This helped Munich Re to offset a lot of the price declines seen across reinsurance lines of business, with the end result being that premiums written at the January renewals increased by 2.7% to nearly €9 billion while the price level, which indicates profitability of the business written, fell by 1.5%. At the same time terms and conditions of treaties remained largely stable, said the reinsurer.
Jeworrek continued; “Munich Re again adhered consistently to its principle of only writing business at risk-commensurate prices and conditions. We can be relied on to provide our clients with capacity, innovative solutions and service of the highest quality. But not at any price.”
Upcoming renewals may be even more challenging for Munich Re and the firm acknowledged that price pressure at April and July may be even greater as those renewals include more of its non-proportional catastrophe reinsurance renewals. It seems that Munich Re is expecting competition from alternative reinsurance capital will be high at both of these market renewal periods.
“In the coming renewal rounds, we will be aiming to buck the general market trend with our tailor-made risk-transfer solutions and with prudent portfolio management,” said Jeworrek.
The reinsurer said that it expects pricing pressure to remain appreciable across property catastrophe reinsurance non-proportional business during 2014 unless any major loss events occur to change the direction of rates.
So even the largest reinsurer in the world is being forced to take action to maintain the profitability of its portfolio in the face of increased capacity driven by third-party capital and ILS while increased competition in the traditional reinsurance market also pressures its renewal prices.
It is worth noting that while reinsurance price pressure may be relieved if the market experiences some significant losses, it does not mean that conditions will get any easier for Munich Re. If rates get a boost in any property catastrophe lines or regions due to losses Artemis expects that the capacity competing to renew loss affected reinsurance programs will increase as more investors come into the market looking for improved return opportunities.
At the same time competition from other traditional players will likely increase after losses too, as some that have moved their focus to other lines of business return to property catastrophe in search of improved returns. This could mean that Munich Re faces increased competition from both alternative and traditional reinsurance capital no matter what the market environment is, whether losses are experienced or not.
A firm as large as Munich Re will be able to continue to look to customised and specialised reinsurance business to compensate, as it has done at the recent January renewals. For smaller reinsurers this prospect of ongoing and perhaps even increasing capital competition may prove more difficult to fend off.