24 October 2017Insurance

Munich Re seeks US growth as rates rise on back of nat cats

Munich Re is seeking opportunities to grow in North America after losses stemming from the large nat cat events in the third quarter improve pricing, Hermann Pohlchristoph, member of the board of management at Munich Re, told Baden-Baden Today.

It is estimated that hurricanes Irma, Harvey and Maria which hit North America in the third quarter will cause around $100 billion in combined insured losses.

The reinsurance industry sees the events as an opportunity to raise prices which have been under pressure in recent years due to the absence of large losses and an overcapacity as third party investors have deployed capital into the reinsurance sector while seeking higher yields in a historically low interest rate environment.

The traditional reinsurance market has been complaining about inadequate rate levels, particularly in the nat cat market, for a while and has been pushing for higher rates in past renewals. After the large losses, the industry is in a better position to get what it is asking for.

“One would expect positive price impacts from this, also considering that for the last five years across the board and in all regions of the world there has been very significant price deterioration. Property cat rates in the last five years fell by some 40 to 50 percent, so very dramatically,” Pohlchristoph said.

After the third quarter nat cat losses, the traditional reinsurers may have the alternative market participants on their side as these will also want higher returns, he suggested.

“After the significant losses, investors are probably expecting higher yields and higher returns and this will also drive prices in the retro market. We already see that happening in the retro market,” Pohlchristoph said.

Before the third quarter events, reinsurers like Munich Re have been struggling to find profitable growth opportunities in P&C and have been shedding business as rates were often deemed inappropriate. But now North America may offer the business opportunity Munich Re was waiting for.

“Here the capacity can be placed at the currently most attractive rates,” Pohlchristoph said.

Munich Re has not yet disclosed any estimates for the losses it is expecting for its own business from the third quarter events. But in mid-September the reinsurer issued a profit warning following the hurricanes in the US. Losses from Harvey and Irma could mean that Munich Re will miss its profit guidance of €2.0 to €2.4 billion for 2017, the company said in a September 13 press release.

“Our risk appetite remains unchanged. We have not yet disclosed any more concrete loss estimates. This is work in progress, but we are absolutely sure that our risk appetite can stay the same. It is not an event that would put us under pressure in that regard,” Pohlchristoph said.

“If there are opportunities when prices are adequate we will be there,” he noted.

Opportunities may appear as the US National Flood Insurance Program (NFIP) transfers more risk to the private sector.

Hurricane Harvey, which is expected to have caused a combined wind, surge, and inland flood losses of between $70 and $90 billion, was mainly a flood event. It may produce at least $4 billion in flood claims to the NFIP reinsurance programme, according to estimates. However, most of the flood losses are expected to be uninsured.

The NFIP is now over $30 billion in debt to US taxpayers, and it may need an additional $16 billion to cover claims from recent storms, particularly Harvey.

The NFIP placed its first significant reinsurance programme in January 2017, ceding $1.04 billion of coverage to a group of 25 private reinsurers and Lloyd’s syndicates in an effort to reduce the accumulation of future debt to the Treasury. Munich Re has also participated in this panel.

The reinsurers that provided the NFIP with flood reinsurance protection are expected to suffer a total loss given the magnitude of Harvey-caused flooding.

US Congress has extended the deadline to reauthorise the NFIP. The programme’s original deadline of September 30 was pushed back to December 8.

“We very much hope this programme will go on,” Pohlchristoph said. He expects that Harvey with the significant flooding in the Houston area will drive the political decision-making in that direction.

“I would be very surprised if we don’t see any significant changes here,” he noted.

While it is fairly clear that rates will increase in the areas hit by the recent nat cat events, it is less clear how this will affect rates elsewhere.

“At the moment it is very difficult to assess and quantify how price increases could look in other parts of the world,” Pohlchristoph said.

“But it’s clear that when you think about a reinsurance portfolio this is a global business and at the end there is also some kind of internal competition for capacity, so we would direct our capacity to those areas which offer the biggest profitability,” he noted.

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More on this story

26 October 2017   Munich Re is expecting a third-quarter loss of €1.4 billion owing to exceptional major-loss expenditure while projecting a small profit for the full year 2017.
9 November 2017   Munich Re incurred a net loss of €1.4 billion in the third quarter of 2017 due to the impact of natural catastrophes in North America but expects “significant” market recovery.
9 November 2017   Munich Re expects around €350 million net profit for the full year of 2017 subject to fourth quarter developments but sees significant signs of improvement in the operating environment for 2018, chief financial officer Jörg Schneider suggested.