Munich Re forecasts intensifying reinsurance rate rises

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Global reinsurance giant Munich Re is clearly pushing hard for further hardening of the market, forecasting that rates increases will actually “intensify” through at the upcoming renewals in 2018 and perhaps beyond, as the company looks to an improved rate environment to support bold profit forecasts through to 2020.

Munich Re logoMunich Re announced its annual results today, as reported by our sister publication Reinsurance News, lifting its profit target slightly over the prior year, forecasting that it would achieve between €2.1 billion and €2.5 billion for 2018, up from the €2 billion to €2.4 billion it had targeted for 2017.

The reinsurer also looked further ahead, forecasting that its primary and reinsurance arms would both add more profit over the coming years, thanks to growth and efficiencies, leading it to forecast that by 2020 it would be targeting at least €2.8 billion and perhaps more in the year’s ahead thanks to growth at ERGO.

Supporting a lot of these targets is also an ambition for higher reinsurance pricing, with Munich Re like so many other major players aware that risks it underwrites are often not meeting the firms cost-of-capital anymore, on a standalone basis.

Yes, major and globally diverse reinsurers like Munich Re can soak up underpriced risks as a diversification strategy, discounting certain risks and peril regions where they dominate, but we’d imagine they would like to see more profitability out of some of these areas of the market and will likely push hard for rate stability at least.

In the wake of the major losses of 2017 Munich Re is forecasting improvements in pricing and secured better rates at the January reinsurance renewals. However, as we noted, the improved rate increases have only been marginal at the recent renewals and reinsurers like Munich Re have grown their books, often in catastrophe exposed areas, for only little pricing gain.

But it’s the combination of better reinsurance rates alongside growth and efficiency drives that Munich Re expects to drive better profits.

CEO and Chairman of the Board of Management Joachim Wenning said, “Munich Re is again poised for growth. Our target for 2018 is slightly higher than the profit guidance for the previous year. ERGO is making steady progress with the Strategy Programme, and our growth initiatives in reinsurance are benefiting from tailwinds as prices rise. We are investing heavily in digitalisation and are cutting costs to prepare for digital transformation and make Munich Re fit for the future.”

So Munich Re grew its premiums at slightly improved pricing at 1/1 2018, helping it to build a technically more profitable book of reinsurance business.

The company is aiming to do similar at the mid-year renewals, but also anticipated that the rate increases will persist.

Torsten Jeworrek, the member of Munich Re’s Board of Management responsible for reinsurance, commented, “Reinsurance prices increased at the January renewals, particularly in the markets affected by natural catastrophes. We expect this trend to continue in the renewal rounds yet to come.”

Most observers that watched the January renewals closely expect that the mid-year renewal will see similar levels of rate increase at best, despite the fact some of the most catastrophe loss exposed programs come up for grabs.

There is a belief that some pockets of higher rate increases may be found, but these are likely to be in the peak catastrophe exposed zones, in programs that reinsurers like Munich Re had begun to walk away from in recent years as the pricing declined.

The question is whether the rate increases warrant jumping back into some of the most catastrophe exposed programs, which are also the programs which have seen the steepest rate declines over the last four or five years.

Given reinsurers appetites to secure growth at any level of higher rates, it seems the mid-year and perhaps also January 2019 renewals are set to be particularly competitive.

But Munich Re feels that reinsurance rate increases are set to persist, perhaps continuing to rise rather than merely staying stable over the coming renewal rounds.

If this proves true it will be a boon for their profit targets and also for the insurance-linked securities (ILS) fund managers, whose returns will be enhanced by any continuation of rate increases.

Wenning explained the “good news” saying that after the impacts of 2017 catastrophes, “prices for reinsurance business renewed at the start of the year increased as a result of the huge market losses.”

Most of Munich Re’s profits come from its property and casualty reinsurance underwriting, hence rate improvements are an important factor in the firms ability to meet profit targets over the years ahead.

Suggesting that rate rises are going to accelerate as well, Wenning forecast, “This positive development is likely to intensify later in the year when many other treaties come up for renewal in the markets affected by the catastrophes. We are confident that market conditions will continue to improve.”

But with the 2018 profit forecast coming with a forecasted P&C reinsurance combined ratio of 99% it is clear that more than just higher rates is required for Munich Re to accelerate its profits from this business.

Wenning explained that both growth and efficiency will be key, “We want to grow profitability in reinsurance with our own initiatives. We will be resolute in seizing opportunities for profitable business. In some selected markets, we will increase our willingness to take on risk without compromising our underwriting principles. At the same time, we will vigorously pursue new markets in uninsured or under-insured risks. One good example of this is the partnership we struck with the World Bank and the World Health Organization last year to cover pandemic risk in developing countries.

“Munich Re is well on track to actively use digital transformation to provide our clients with better, more efficient and tailored solutions. At the same time, we are cutting costs and setting targeted impulses for profitable growth.”

Intensifying reinsurance rate increases sounds like good news for everyone, but still evidence from early renewals, catastrophe bonds and other price indicators, suggest that rates at the mid-year may not live up to everyone’s expectations.

That’s not to say they won’t for Munich Re, as if it can grow its book at higher rates and losses come in within expectation, it will deliver higher profits.

But it cannot be understated how important the efficiency drive will be at major reinsurers like Munich Re. The reinsurer targets becoming leaner and less complex, Wenning said this morning, even highlighting that Munich Re may divest from less core activities, although details weren’t given.

Better rates alone will not sustain a company of 42,000 employees over the longer term. It is efficiency, innovation, digitalisation and finding better ways to originate and then place risks, matching them with the right capital, that will enable such large companies to profit and grow sustainably over the long-term.

That may involve some painful decisions, on the efficiency side (restructuring costs feature heavily in the annual report and Wenning explained the reinsurer expects job cuts in reinsurance this morning), some disintermediation, on the origination and placing side, and an openness to working with the capital markets more closely, all of which it is highly possible Munich Re is unafraid to pursue over the coming years.

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