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1 September 2013 Reinsurance

Pressure from the West

The impact of the influx of alternative forms of capacity into the reinsurance will mainly be felt in the US in this upcoming renewal, with pricing pressure on rates varying depending on how much of a reinsurer’s book covers some of the peak perils targeted by this form of capacity. But reinsurers in the firing line could be forced to review their strategies.

That is the view of Torsten Jeworrek, chairman of the reinsurance committee at Munich Re, who says that this influx of capacity combined with the industry’s overall strong capitalisation means he expects a stable renewal with pressure on rates in certain areas.

“The insurance sector’s capitalisation remains strong,” he says. “This is due to past profits and also to the persistently low interest rate environment which inflates the market value of the fixed-income portfolio.

"Pricing needs to be based on risk-free rates, and a strict focus on the liability side should be the main source of value creation."

“Market conditions will be challenging owing to the abundant reinsurance capacity available and alternative capital sources, increasing the price pressure in nat cat scenarios. Generally, we expect widely stable reinsurance pricing over all lines of business, with a different degree of price pressure in the various nat cat segments.

“To a very large extent, the alternative capital is invested in vehicles covering top US nat cat scenario risks such as US wind and US earthquake. That is why we are seeing increased competition in non-proportional catastrophe reinsurance, especially in the US market. For the foreseeable future, the capital influx will remain first and foremost within the nat cat XL space, with a certain focus on top US scenarios.

“Reinsurance companies with a pure or dominant focus on large catastrophe capacities could come under pressure and therefore consider changing their strategy and moving into other lines of business or segments. This of course requires the relevant know-how.”

Jeworrek emphasises that such an influx is nothing new to the industry. The same thing happened in a different way in 1992 after Hurricane Andrew and in 2005 after Katrina, Rita and Wilma. And he says the long-term durability of this capital is yet to be tested.

“It is not clear if this inflow is sustainable, as only a certain portion of the additional capital also stayed in the market in the past,” he says. “The sustainability has also not yet been tested by a huge catastrophe loss. We are convinced that an in-depth understanding of the risks is key for investors.”

Solvency II will, he says, be another big talking point at Monte Carlo among European companies. The introduction of the regime has been delayed because of the ongoing debate about the valuation of long-term guarantee business in life. He says that Munich Re continues to support Solvency II as a holistic and risk-based regulatory regime. “But we question the high administrative burden from new reporting requirements,” he says.

The prolonged low interest rate environment will also be very much on the agenda. He says this has led to a gradual reduction in investment earnings and has increased the importance of the underwriting result for reinsurers. But he believes the industry’s innovation will also overcome these challenges.

“The industry is developing new cover concepts in life with modified saving and guarantee products to cope with the challenge. I’m convinced that underwriting excellence and discipline are key in times of uncertainty. Hence, pricing needs to be based on risk-free rates, and a strict focus on the liability side should be the main source of value creation,” Jeworrek says.

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