Over the next few years reinsurance giant Munich Re does not expect any significant growth in insurance or reinsurance demand, the company’s Board said today, which suggests that with the excess capital sloshing around the market pressure will not ease any time soon.
Board of management member for reinsurance at Munich Re Tosten Jerrowek told a media briefing at the 2016 Monte Carlo Reinsurance Rendez-vous today that the reinsurers analysis suggests a relatively tepid outlook for market demand.
“No significant growth is expected in insurance and reinsurance,” Jerrowek said, adding that while growth might be higher in emerging markets, developed markets would see relatively static demand for re/insurance protection.
For the reinsurance market in particular, Jerrowek said that Munich Re only anticipates 1% growth in the coming years, a level that will not be sufficient to soak up any of the excess capital or alternative capital in the market today.
For some years the market has been looking to China as a potential source of growth, but Jerrowek said that Munich Re expects reinsurance cessions in China will slide, due to the introduction of the C-ROSS solvency regulatory regime.
There will be a “negative impact on capital levels required” Jerrowek said, adding that the result will be a lower demand for reinsurance in the country.
With the reinsurance market awash with traditional capital while alternative capital continues to grow, this situation of sluggish growth is likely to exacerbate the pressure on reinsurers at a time when profits have been dropping.
“The market environment for the insurance industry continues to be dominated by strong competition and relentless pressure to change,” Munich Re explained in a press release today.
“Competition is characterised by low interest rates, high capitalisation of market participants, and the impact of alternative capital,” the company noted. “There is still ample capacity available. But pressure on prices, terms and conditions has eased off slightly in recent renewal rounds.”
While pressure may have lessened somewhat, as the reinsurance market reaches the bottom of pricing appetite and has reduced ability to give more away to clients, the fact growth is not being seen or expected does suggest a steady depression of rates is likely ahead.
With returns on equity now so low that reinsurers are barely meeting cost-of-capital, as Willis Re said today, the outlook looks gloomy if demand cannot be increased.
Munich Re itself is responding through the means of “active cycle management, customised reinsurance solutions, and innovation,” the company said.
In addition to complex, tailored solutions, “We are also driving innovation forward, often working in tandem with our cedants,” Jeworrek explained. “Innovation in areas such as product development, data analytics, automated underwriting and supporting digital business models means that together with our cedants we are able to take advantage of profitable growth opportunities.”
Munich Re sees the “constant expansion of the boundaries of insurability – increasingly supported by digital technology” as key to its own success, in a market environment that is challenging and lacking in new underwriting opportunities.
For the smaller reinsurers lack of demand growth could be fatal though, as they may not be able to devote such high levels of capital to innovation to help them profit and survive.
Less growth will also make things difficult for alternative capital and ILS providers, perhaps pushing them to ramp up price competition again. However the lower cost-of-capital and efficiency of ILS capital could help them to benefit from this trend, taking business away from some of the small and mid-tier of the reinsurance market.