Munich Re expecting “significant market recovery”

Munich Re is the latest of the major reinsurance firms to signal that it is expecting at least some reversal of recent price softening across catastrophe business and perhaps other lines, as it hopes for a “significant market recovery.”

The majority of the reinsurance market is calling for large increases in rates at the upcoming reinsurance renewals in January 2018 and a number of the major players are expecting to find opportunities in areas of the market from which they have retreated in recent years, due to the prolonged softening of rates.

Munich Re is among those anticipating that pricing is on the up after the company reported its third-quarter results this morning, revealing a loss of -€1.4 billion and an expectation that for the full-year a small profit could be achieved.

But Munich Re, like the rest of its cohort of global reinsurance players, expects a market turn and an opportunity to recover some of its losses through higher rates at renewals.

Following the companies “high loss” in the third-quarter, Munich Re said that it is “expecting a significant market recovery.”

Jörg Schneider, Chief Financial Officer, explained Munich Re’s expectations, “Our capitalisation is strong, and we are able to take full advantage of opportunities arising from the likely market recovery.

“We expect prices to rise again in the forthcoming negotiations – particularly in the markets that have been hardest hit by recent natural catastrophes.”

Market sources are already reporting that pricing expectations in early renewal discussions are pointing to price increases, with retrocession still highlighted as the area of reinsurance where the greatest recovery in pricing may be found.

Helping this is the fact that the majority of collateralized reinsurance focused ILS fund managers are also pushing for some level of price increase in their renewal discussion, meaning that (so far) it seems that traditional and alternative are roughly aligned on their demands for rate increases.

Munich Re believes that the three U.S. and Caribbean hurricane losses, Harvey, Irma and Maria, will together result in an industry-wide loss of around $100 billion, which it sees as sufficient to cause a correction in pricing and a reversal of some of the softening seen in recent years.

Its own losses from the recent hurricanes remains at its earlier estimate, for a total of €2.7 billion of losses, and major loss bill for Q3 of €3.2 billion. However the reinsurer noted that, “uncertainty about loss estimates, will continue for many months.”

Munich Re’s expectations for price rises are perhaps less bullish than some other reinsurers, as it is not expecting broad increases across the market.

“After all the major natural catastrophes, we expect prices in the USA to increase for the renewals as at 1 January 2018. Prices should also stabilise in other regions,” the reinsurer said.

Broad stabilisation could mean a pricing floor finally emerges across reinsurance markets that have softened steadily, while price increases in the U.S. are certainly warranted in some areas where rates have declined 40% or more in recent years.

Two questions still remain though. How much of a rate increase on U.S. property catastrophe reinsurance and retro business is needed to satisfy the markets, and can alternative markets be satisfied with lower rate rises than traditional?

The chances of someone being disappointed at the January 2018 reinsurance renewals continues to increase, we believe.

With traditional reinsurers bullish for price rises and some looking to make the most of increased rates in retro and property catastrophe business where ILS and collateralized markets have made so much headway in recent years, there is likely to be high levels of competition.

Could we see ILS pushed back in some areas as traditional capacity flows back in? Or could we see ILS making gains, as it wields the efficiency of its capital and business model to good effect? Or could we even see reinsurers using even more third-party capital in competitive parts of the market, as they see an opportunity to boost revenues with additional fees? Finally, could the catastrophe bond market find that this is its opportunity to expand dramatically, as re/insurers look to top-off their reinsurance programs and cat bond investors offer the lowest price increases?

Many questions, most of which we won’t know the answers of until well into January 2018 and beyond. The dynamics of the reinsurance market are set to fluctuate over the coming months until an equilibrium is found, which may not be until the mid-year 2018 renewals, we believe.

Reinsurers like Munich Re may get to benefit from a “significant market recovery” for at least a short period of time, but there is every chance that market conditions deteriorate again in 2018 under weight of capital. The hope will be that any future softening is more restrained, as underwriters have now experienced a large loss while rates were at (or near) the bottom of the market.

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