Harvey will revive the pricing debate
Hurricane Harvey, which wreaked havoc in Texas at the end of August, may have the potential to revive discussions around the pricing of catastrophe risk, Torsten Jeworrek, head of reinsurance of Munich Re, told Monte Carlo Today.
“Hurricane Harvey, one of the strongest hurricanes since Katrina in 2005, is sure to affect discussion of the right price levels in cat business,” Jeworrek said.
Total flood losses stemming from Hurricane Harvey could reach almost $40 billion according to estimates, but some 70 percent of these losses could be uninsured. It has since been followed by Hurricane Irma, the impact of which remains to be seen, although losses could also be significant.
“Hurricanes like these illustrate the enormous volatility that exists in this business, which can only be profitable with sustainably adequate prices,” Jeworrek noted.
Over time, the market has to find a balance between supply and demand, and less attractive returns or even losses will lead to that, Jeworrek continued.
The current soft market in property/casualty has particularly affected the nat cat business, where excess capacity is pressuring prices. Record levels of insurance-linked securities were issued in the first half of 2017, further illustrating investor interest in this sector.
But the impact of alternative capital on market rates is a lot less than commonly believed, Jeworrek said.
The segment alternative capital operates in is very narrow, and volumes are comparatively low, he explained. To a very large extent, alternative capital is invested in vehicles covering peak risk scenarios such as US wind and US earthquake, due to their short-tail nature and the availability of external models, Jeworrek explained. In these market segments, alternative capital is a source of competition for capacity, but Munich Re continues to generate good new business in these lines, he noted.
Alternative capital can be complementary to reinsurance. “There is huge demand to develop insurance solutions for risks which are difficult to diversify within our industry, such as pandemics,” Jeworrek said.
“Bringing risk to capital markets via solutions jointly developed by the insurance industry and strong partners such as development banks shows us that the entry of capital markets into re/insurance can be a good thing for all of us,” he added.
For the upcoming January 1 renewals, Munich Re doesn’t expect any overall change in average prices, but rather in selected regions or lines.
Due to the soft market, Munich Re wants to maintain an active cycle management and offer its capacity only where it is able to obtain risk-adequate prices, terms and conditions, Jeworrek explained.
“Where this is no longer the case, we stop doing business,” Jeworrek said. However, he believes that Munich Re’s capacity, expertise and customised services are in demand, putting the company in a strong position to operate in the market.
“It’s not our approach to wait and hope that the market will turn,” he said.
Munich Re wants to deploy its capacity in regions and lines of business where rates are still commensurate, while at the same time developing new solutions for emerging risks and new demands.
“Despite the overall soft market, there are still selected markets and lines of business which look promising and where Munich Re is eager to take chances,” Jeworrek said.
“I see further business opportunities if we manage to close the existing insurance gap, develop products for new perils such as cyber, and offer new solutions and services for our clients in a digital world.”
One driver for growth is weather-related natural hazards exposure which is showing an increasing trend as the climate changes and the concentration of values in particularly exposed regions becomes greater, he explained.
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