11 September 2017 Insurance

Hurricane losses and rising interest rates to boost profits: SCOR

The combination of a more active hurricane season in North America turning pricing in the market and the ceasing of quantitative easing in the US and Europe could trigger an end to the declining profitability of property/casualty reinsurance business, according to Denis Kessler, the chief executive of SCOR.

Years of soft reinsurance rates, combined with low interest rates, have squeezed the profitability of the reinsurance sector. But this situation is set to change, according to Kessler, speaking at a press conference at the 2017 Monte Carlo Rendez-Vous.

He believes interest rates will rise in the US and in Europe, boosting investment returns. SCOR believes that it will be able to take advantage of such a move by investing in new bonds with better returns. “This could pave the way for improvements in the profitability of the industry,” Kessler said.

In addition, he believes that losses from hurricanes Irma and Harvey will change pricing in the non-life market.

“The industry will be shaken by Harvey and Irma,” Kessler said. Some players will be heavily impacted and these will revisit business plans and reduce capacity; some may exit the market because they will lose support from clients and shareholders, he suggested. The shake-up will also extend to government-backed insurance schemes in Florida and Texas.

“It’s a major stress test,” Kessler said. It will affect the whole value chain including retrocession, reinsurers, primary insurers, cat bond holders and the government, he noted. As a result, risk aversion among reinsurers is going to increase.

Capacity in reinsurance is at peak levels, but Hurricane Irma may impact the capital base of some reinsurers, affecting the capacity available and therefore prices, Kessler said.

Victor Peignet, CEO of global P&C business at SCOR, added: “Change is inevitable.” He argued that if profitability continued to deteriorate, this would lead to some players not being able to absorb even minor shocks because of lack of a cushion.

As a result, the weaker players will become even weaker, leading to a natural selection of the market with the gradual elimination of some reinsurers. At the same time, the stronger players will become even stronger, Peignet noted. Alternatively, a large loss would be more damaging for the weaker player, again triggering change, he added.

He also expects these losses to test the resolve of third party capital providers. “The attitude in the cat bond market will change after losses. It’s a test,” Peignet noted.

Kessler said SCOR is well placed to withstand the challenges the reinsurance industry is facing, stressing its diversified portfolio with more than 50 percent of premium income coming from the life business. SCOR had also reduced its exposure to Florida prior to the hurricane season because of what it deemed as inappropriate pricing.
And, Kessler believes, the operating environment for reinsurers is now set to improve.

“If you combine the developments on the asset side with the liability side, maybe we are at the end of an era where we had low rates on both sides,” he said.

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