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Munich Re forecast bodes well for those that reserved prudently


Global reinsurance giant Munich Re yesterday came out with a forecast for its first-quarter 2018, saying that it expects to achieve a consolidated result for the period of over €800 million, which would be the most profitable start to the year the company has experienced since 2014.

The forecast, which was announced by the reinsurance firm late yesterday and covered here by our sister site Reinsurance News, saw Munich Re confirming what it had previously said, that the higher rates available in reinsurance at the January renewals would result in better profits for this year, and perhaps beyond.

Munich Re had said that it expected to achieve higher profits, thanks to improved reinsurance pricing conditions following the major losses of 2017.

The company said that its forecast of more than €800 million of first-quarter profit was thanks to a “randomly low incidence in major losses” during the period, which means that it experienced a low major-loss expenditure in its core reinsurance division.

Better pricing and fewer losses means a positive quarter for the reinsurer and analysts are now suggesting that this could read across to a number of reinsurance firms, particularly those that have reserved prudently for the hurricane and wildfire loss events of 2017.

The same applies to the insurance-linked securities (ILS) and collateralized reinsurance fund sector, where prudent reserving for 2017 losses combined with having achieved better rates at the January 2018 renewals, could combine to deliver better performance for the first-quarter of 2018.

Of course, it is much easier for major reinsurance firms to set very large reserves for catastrophe events. In fact, many reinsurers will set reserves significantly larger than required to pay claims, in the knowledge that they can release them at future junctures.

ILS funds and collateralized reinsurance vehicles do not have as much leeway with reserving, in that while they will reserve to the maximum loss they expect to suffer (at least), they cannot reserve significantly (or as high as globally diversified reinsurers can) above the anticipated level of loss, as otherwise they could be unnecessarily trapping additional capital.

With some ILS funds having experienced adjustments to industry losses and ultimate net losses for catastrophe reinsurance treaties exposed to the 2017 hurricanes in each month so far this year, this has become particularly evident as some ILS strategies can find themselves with less reserves available to absorb such major movements in loss expectations.

The ability to reserve and over-reserve can be hindered if portfolios aren’t large enough, diverse enough, or the positions making up a portfolio are particularly large. All of these factors can make it harder to set reserves with enough buffer to soak up loss escalation, particularly in the case of complex losses, or an aggregation of losses like in 2017.

But for those that have large enough portfolios and which have had the foresight to reserve above the required minimum levels for each loss event, there is a chance that they could find their first-quarters buoyed a little, by the better rates secured at 1/1 and the lower incidence of major losses in the quarter.

Munich Re also said after the renewals that it is convinced there will be some ongoing, perhaps intensifying, rate hardening, through the remaining renewals of this year and perhaps beyond, which suggests that as long as major losses remain absent the reinsurance sector and many ILS funds could actually find this Q1 ends up with better results than they’ve had for a number of years.

A low-level of major losses reported by one of the world’s largest reinsurance underwriters means the rest of the market should experience a similar benefit, ILS funds and collateralized vehicles included.

However, this year, with the ramifications and fall-out from the 2017 catastrophe losses still hitting results for some over the first three months of the year, there could also be quite a divergence amongst the quarterly results of ILS players.

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