In its second-quarter earnings and first-half financial report representatives of the world’s largest reinsurance company Munich Re made some comments related to the impact of third-party capital backed capacity on recent reinsurance renewals. Munich Re feels the impact of third-party capital but believes this capacity is restricted for the moment.
In its second-quarter results release Munich Re highlighted the growing competition in the reinsurance market, some of which has been created by inflows of capital from institutional investors. Despite this however, Munich Re said that at the July 1 renewals it maintained the levels of premiums it underwrote compared to 2012 and only at a slight 0.9% drop in pricing, demonstrating how its broad business scope can insulate it from more local market price movements.
Torsten Jeworrek, Munich Re’s CEO of Reinsurance, commented; “The results of the renewals at 1 July reflect our intent to achieve risk-commensurate prices even in a competitive market environment. Despite sometimes substantial competitive pressure in natural catastrophe business, the price reduction for the business we wrote remained moderate. That is a consequence of our broadly diversified portfolio. Our ability to devise complex and tailor-made solutions for our clients also played a mitigating part.”
In the first-half financial report Munich Re acknowledged that it is seeing an increasing supply of capacity in the reinsurance market from new sources of capital, with pension funds in particular showing increasing interest in reinsurance as an alternative investment asset class.
The pressure this is putting on pricing remains largely within the United States at the moment, according to Munich Re, and it doesn’t see that changing quickly. The report states; “We project that the new capacity will be restricted to natural catastrophe covers in the foreseeable future, as more complex risks require specific know-how and risk diversification is not so evident there.”
It’s certainly true that the focus of third-party and ILS capacity is likely to be predominantly on U.S. risks but we do see an increasing trend and desire to broaden the markets reach and a number of ILS companies and initiatives are trying to expand the market gradually, opening up new opportunities for investors.
During Munich Re’s earnings conference call the topic of third-party capital and its impact on reinsurance rates and renewals was raised again.
Torsten Jeworrek said that the firm observed a considerable increase in institutional investor capacity coming into the catastrophe reinsurance market in recent months. It now believe that this amounts to approximately $44 billion or 17% of the global catastrophe reinsurance market, figures which are aligned with other estimates.
However, the source of this institutional capital is different to past years, explained Jeworrek, saying that this time Munich Re has observed that capital inflows have largely been from pension funds and so far it this capital has concentrated on the U.S. catastrophe reinsurance market, hence the impact to renewal rates there.
Jeworrek went on to explain the pricing that Munich Re saw at July 1. He said that the expectation had been that July 1 would be a soft renewal market and indeed Munich Re saw rate reductions in the order of 10% across the U.S. catastrophe reinsurance market, and 15% to 20% in Florida.
Jeworrek then made a very interesting, and perhaps telling, statement regarding this third-party capital and how it conducted itself at the renewals. Jeworrek said that at the July 1 renewal Munich Re noticed that this new institutional investor backed capacity often competed by choosing to use the cheapest catastrophe model available in the market.
This differentiates them, explained Jeworrek, from traditional reinsurers who use more than one model, or their own internally developed risk models. He said that the cheapest model is not necessarily wrong, but added that; “This tells me something”.
That comment is perhaps not surprising coming from a major reinsurer which naturally has a higher cost-of-capital than many of the newer ILS and third-party capital reinsurance market entrants. Understandably many of the ILS market companies cannot afford the luxury of access to all of the major risk models and cedents tend to appreciate that, often sharing their own internal modelling of risks to aid an ILS players view of risk. However, issues around access to technology, resources and underwriting diligence are likely to be raised increasingly as ILS capital continues to impact on the domain of traditional reinsurers.
For a reinsurer the size of Munich Re, the influence of third-party capital can also lead to retrocessional opportunities for itself. Munich Re currently has approximately $400m per event coverage from catastrophe bonds for U.S. hurricanes, U.S. earthquakes and European windstorms, its peak perils, explained CFO Jörg Schneider.
Schneider explained that Munich Re would continue to analyse the catastrophe reinsurance market and consider seriously how it can make use of the increased availability of catastrophe retro and if pricing is attractive they will consider using it to increase their protection.
Looking ahead, Munich Re believes that further price declines are likely at the January 2014 reinsurance renewals, particularly in non-proportional natural catastrophe reinsurance, because of further increases in available capacity. However the firm will aim to rebalance its underwriting portfolio, perhaps with more focus on insurance covers as well, in order to maintain financial targets.
It’s always fascinating to hear the comments of the large reinsurance firms regarding the growing convergence market and participation of institutional capital in reinsurance-linked investments. If you’re travelling to Monte Carlo in September for the Rendez-vous event, you can hear more of Munich Re’s thoughts on the ILS space at its regular ILS Roundtable event, titled Insurance-Linked Securities: A market with a bright future, on the 9th of September. Register for the event here.