The strongly increasing supplies of primary insurance and reinsurance capacity continue to be matched with growing demand that has yet to be exhausted, according to the world’s largest reinsurer Munich Re.
While the expected pressure on reinsurance margins continues, and property catastrophe reinsurance in particular remains pressured, Munich Re sees opportunities which in the first-quarter of the year have enabled it to continue to generate reinsurance premiums.
In a challenging market where reinsurers are typically pulling back on capacity deployed, Munich Re believes that demand is rising, in certain bright spots in the market, allowing it to continue to deploy its capital, albeit at slightly lower rates.
Munich Re’s CFO Jörg Schneider said that there remains a strong demand for insurance and reinsurance in many parts of the world.
Schneider explained; “As a result, the strongly increasing capacity supply in the primary insurance and reinsurance sectors at present is matched by a demand potential in many classes of business that is not yet exhausted.
“Working together with present and future clients and partners, we aim to tap this potential by focusing all of the Group’s extensive knowledge even more strongly on innovations.”
Profits fell at Munich Re during the first-quarter, coming in at €790m, down roughly 16% from the prior years €936m. However this decline is less than was expected by analysts, which had estimated around €760m to €780m.
Reinsurance contributed €668m of the consolidated result, down from €768m a year earlier. Gross premiums written climbed by 2.2% to €7 billion, although Munich Re says this was largely due to foreign exchange rate development. P&C reinsurance premiums were up by 5%, while life reinsurance saw a slight decline.
A higher combined ratio in P&C reinsurance, of 92.3% was the result of higher losses in the quarter. Natural catastrophe losses came in at €66m, up from €36m, but man-made losses jumped to €189m from €3m. Major losses cited were windstorm Niklas at €40m, Cyclone Pam at €30m and a U.S. refinery fire at €35m.
Munich Re was pleased with the April reinsurance renewals, finding opportunity to deploy its capacity, despite the ongoing pressure on prices.
“Pressure on prices, terms and conditions remained high, so we are adhering strictly to our consistent cycle management. But as we were able to take advantage of selective opportunities in individual markets, our premium volume nevertheless increased slightly,” Torsten Jeworrek, Munich Re’s Reinsurance CEO explained.
Munich Re saw an average price decline of -2.6% across the April reinsurance renewals, a lower number than the prior year. This despite 40% of its renewals being natural catastrophe focused.
Munich Re continues to be among the most bullish of the major reinsurers when it comes to finding new opportunities to deploy capacity. The firm believes strongly that demand remains and that by providing innovative solutions it can find ways to navigate the challenging market, while ensuring capacity is put to good use.
The Q1 report explains this thinking:
Although the insurance density in many industrialised countries is already high, even these markets often have an additional need for insurance cover. This is because weather-related natural hazards exposure is showing an increasing trend as the climate changes and the concentration of values in particularly exposed regions becomes greater. And even previously, only a small portion of the total economic losses from major natural catastrophes was insured. In growth regions, the demand for insurance is increasing for protecting manufacturing capacity and the rising prosperity of the population. Moreover, all around the world, only a small portion of the risks from potential liability claims by third parties are insured. As a result, the strongly increasing capacity supply in the primary insurance and reinsurance sectors at present is matched by a demand potential in many classes of business that is not yet exhausted.
Munich Re again discussed positively its ability to put together complex risk solutions for large clients, its abilities in weather risk management and hedging, its work with new industries such as renewables and also its use of the capital markets.
In connection with alternative risk transfer, we exploit the advantages of the dynamic market environment and securitise insurance risks on the capital markets both for our clients and for us.
However the supply of capacity shows no sign of relenting, the reinsurer explains, which will increase the pressure on traditional lines and continue to push firms like Munich Re to innovate more rapidly.
In property-casualty reinsurance, we are currently experiencing unrelenting competition. On the one hand, given their good capitalisation, primary insurers are ceding fewer risks to reinsurance, which tends to result in falling demand for cover. On the other hand, reinsurers are able to provide ample capacity, since their capital base has also steadily improved thanks to the good results posted over the last few years.
And the reinsurer cites alternative capital and the ongoing interest of institutional investors as a cause of increasing supply, which makes its life more challenging.
There is also the ongoing availability of alternative capital in the US market: institutional investors such as pension funds increasingly favour insurance securitisation and other forms of reinsurance-like transactions. Accordingly, there is currently appreciable surplus capacity on the supply side.
Interestingly, Munich Re believes that the pressure to expand terms may be relenting, suggesting that both traditional reinsurers and alternative capital are likely pushing back harder on cedents attempts to secure expanded coverage.
The prices, terms and conditions for reinsurance cover are therefore under increasing pressure across the board, albeit with decreasing intensity.
Looking ahead, Munich Re said that it expects the upcoming mid-year renewals will “remain competitive provided the market is not affected by major loss events.”
However the reinsurer does expect pressure to ease, perhaps suggesting that a pricing floor is now within reach, “the pressure on prices should ease still further after two years of price deterioration.”
Munich Re said that it’s expectations for the rest of 2015 have not changed, although it does expect foreign exchange effects will boost its total premiums written for the year by almost €2 billion. It also expects its property casualty reinsurance combined ratio will come in 1% better than forecast, due to the low levels of losses in Q1.
As a result, Munich Re continues to target a consolidated result of €2.5 billion to €3 billion.
CFO Schneider commented; “Our good capital position allows us to continue making targeted use of opportunities for profitable growth in individual regions and lines of business. In the long-term, above all we want to grow profitably with innovative business.”
Large reinsurers like Munich Re continue to be able to put capacity to work and return attractive results. Of course the results have been assisted by a continued low-level of major losses, making the results of all the major reinsurers look better than perhaps had been expected.
By seeking to find niches within the market where capacity can be deployed at reasonable returns, serving large clients with complex risk solutions, leveraging lower-cost alternative capital and diversifying further through its primary, life and health sides, Munich Re will continue to navigate the challenging market.
So while the market remains challenging and prices remain under pressure, there are clearly opportunities. All of the major reinsurers have cited their ability to find places to deploy capacity in their quarterly results.
For the ILS market it’s clear that there will be opportunities in the future to benefit from the work of major reinsurers like Munich Re. Opportunities to deploy capital alongside the major reinsurers, or to even follow it into more complex and solution driven areas of insurance and reinsurance could be a future growth opportunity for the insurance-linked securities (ILS) market.