Swiss Re Insurance-Linked Fund Management

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Biggest reinsurance firms, Munich Re & Swiss Re, see tough times ahead


The two largest reinsurance companies in the world foresee difficult times ahead as reinsurance prices continue to soften, competition continues to rise and pressure from alternative capital and ILS continues, as the key January renewal season approaches.

Munich Re, the world’s largest reinsurer, and Swiss Re, the world’s second largest, both see difficult times ahead and no sign of pressure letting up. Both have made comments in recent days, timed around the Baden-Baden reinsurance meetings in Germany, suggesting that conditions even for these large reinsurers will not get any easier as we move into 2015.

Factors have converged on reinsurers, squeezing their ability to make profits and forcing them to look to new areas of the market, or to double down on offering complex, large primary insurance solutions to corporate. Both Munich Re and Swiss Re have taken this route, pulling back on some property catastrophe reinsurance lines, where rates are no longer considered adequate, and putting an increased focus on their corporate and industrial risks divisions.

But both see continued pressure as the converging factors, of excess traditional reinsurance capital, increasing volumes of alternative capital from insurance-linked securities (ILS) investors, a reduction in and rationalisation of reinsurance buying from cedents and heightened competition from players desperate to maintain market share, continue to put a squeeze on margins.

Munich Re CFO Jörg Schneider told German newspaper Handelsblatt that the price war continues and that it expects the price competition to continue. As a result of this competition softening prices, Schneider said that it will be difficult for Munich Re to maintain its current levels of profit through 2015.

“When negotiating contracts with our customers in 2014, prices have fallen – the losses resulting from this will have an impact in 2015,” Schneider told Handelsblatt in an interview (available in German here).

As a result of the pressure on reinsurance pricing; “It will therefore be difficult to maintain the level of profit,” in 2015 said Schneider.

The expectation is that the January reinsurance renewals will see additional pressure on core property catastrophe lines of reinsurance business, as well as increasing pressure across the market, as both traditional and alternative capacity is diverted in search of better returns.

Frank Reichelt, head of Swiss Re’s German and Nordics reinsurance business, spoke to Bloomberg today in Baden-Baden and said that conditions have not changed from 2013 and that further pressure is ahead.

“Earnings in the reinsurance industry are under pressure and that won’t change unless we see a notable rise of interest rates or a major catastrophe claim,” Reichelt explained.

The availability of capital is a key factor in the pressure large reinsurers expect to face. The pressure from capital markets backed ILS capacity remains a key issue, but it is exacerbated and perhaps even overshadowed by the excess traditional capital in the market and the competition for signings that traditional reinsurers are demonstrating.

“Alternative capital provided by sources like pension funds is still lured by above-average returns into the reinsurance market,” he commented. “And it’s increasingly seeking to diversify into regions and risks other than U.S. hurricanes, which may result in pressure on margins in a broader spectrum of the market.”

There is an expectation that pressure on reinsurance pricing may be more widely spread at the January renewals, as both traditional and non-traditional capital look for returns outside of property catastrophe lines and key regions.

With the world’s two largest reinsurers both saying that they expect continued pressure on their businesses, earnings and profits, it’s clear that renewal negotiations in the run up to January are more important than ever for them. With shareholders expecting a certain level of profits from these reinsurers, they will be as keen as anyone in the market to secure sufficient premium income to provide reasonable profits.

If these two huge reinsurers are feeling the pressure, you can just imagine how smaller, more narrowly focused reinsurance firms are feeling with January fast approaching. The ability for everyone to maintain profits at current levels is slipping away.

Read some of our other recent coverage of Munich Re:

Changing weather risks need bespoke reinsurance solutions: Munich Re.

Munich Re’s resilience to soft reinsurance market is faltering: RBC.

Competing over the same cake could have disastrous results: Munich Re.

Weather derivatives trading unit complements Munich Re: S&P.

Munich Re feels competition, but hints at capital markets opportunities.

Read some of our other recent coverage of Swiss Re:

Capacity alone not a sustainable reinsurance business model: Swiss Re CEO.

Swiss Re pledges $10bn in re/insurance capacity for climate risks.

Swiss Re falls short, strategy shifts in softening reinsurance market.

Alternative capital cannot replace traditional reinsurance model: Swiss Re’s Liès.

Reinsurance pricing down, but still attractive. Pressure felt: Swiss Re.

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