Published by Property Casualty 360
The worst reinsurance market in memory looks set to carry into 2015, industry executives said.
An absence of costly disasters and increasing competition from new entrants dragged on prices this year, and reinsurers may struggle to halt the slide when they meet with brokers and clients in Monte Carlo this month to begin negotiating next year’s property-and-casualty policies.
“This soft market is probably in a universal way unmatched by previous cycles I’ve lived through,” said Manfred Seitz, managing director of international reinsurance at Warren Buffett’s Berkshire Hathaway Inc. and an industry veteran who started his career at Munich Re in 1972. “We have a deterioration of pricing over a longer period of time in practically all classes of business,” he said at a roundtable of reinsurance executives organized by Bloomberg News.
Prices dropped this year during each of the policy renewal periods in January, April and July, according to broker Guy Carpenter & Co., the seventh year in the past 10 that rates have slumped. The declines were “across virtually all geographies and lines of business, many in the double-digit range,” the New York-based firm said in a July report.
Reinsurers including Munich Re and Swiss Re Ltd. sell coverage to insurers such as Allianz SE and Axa SA to help them shoulder claims.
“The trend throughout 2014 was shocking — prices declined very rapidly,” Juergen Graeber, a management board member at Hannover Re, the world’s third-largest reinsurer, said at the Bloomberg roundtable. “We don’t have room to give. That’s why we cannot compromise on underwriting discipline.”
Record-low interest rates have lured new participants seeking higher investment returns to put up capital to back reinsurance risks. Hedge fund investors including John Paulson, Daniel Loeb and David Einhorn have established reinsurers to gain access to money that’s less subject to client withdrawals and to benefit from tax advantages in locations like Bermuda or the Cayman Islands. TIAA-CREF is among pension funds investing in insurance-linked securities such as catastrophe bonds.
While lower-than-average catastrophe claims cushioned reinsurers earnings in the first half, they also eroded their pricing power as buyers were less compelled to seek protection. Falling costs for reinsurance are putting pressure on primary insurers to reduce prices as they compete for business.
“That capacity finds its way to the retail space and we are seeing this now in North America,” said Paul Horgan, who buys coverage as head of group reinsurance at Zurich Insurance Group AG. “In terms of the pricing, if there are no major events our anticipation is that it will continue to drift lower.”
Nikolaus von Bomhard, chief executive officer of Munich Re, the world’s biggest reinsurer, said on Aug. 7 that alternative sources of capital may lead traditional reinsurers to take too many underwriting risks to win business. That could force the industry to make riskier investments to offset unprofitable underwriting, a strategy that led to losses more than a decade ago when the dotcom bubble burst.
“We are kidding ourselves that we can make good some of the shortfall on the underwriting by being more aggressive on the investment side,” Amer Ahmed, CEO of Allianz Re, the reinsurance arm of Allianz, said at the Bloomberg event. “It is burning the candle at both ends.”
A.M. Best, Fitch Ratings and Standard & Poor’s have a negative outlook on the reinsurance industry on concern that shrinking margins and more favorable terms being offered to clients threaten to strain companies’ financial strength.