Reserve release potential drying up for some reinsurers, says Munich Re CFO
Prior-year reserve releases, which have been supporting reinsurers’ profitability in the current soft market, are drying up at some reinsurers, which may help to increase rates, Munich Re chief financial officer Jörg Schneider suggested.
Because of an absence of large losses in property/casualty (P&C) in recent years, reinsurers have been able to release reserves from prior years, boosting underwriting profitability. Rates in the P&C market have come under considerable pressure as the sector attracted investors looking for yield in a historically low interest rate environment. If reinsurers’ results can no longer be boosted by prior-year reserve releases, they might have to further shed lower-priced business, potentially improving overall underwriting conditions.
“Reinsurers need to earn money,” Schneider commented during the reinsurer’s May 9 first quarter results press conference.
Extremely low inflation rates have in recent years substantially contributed to positive performance of primary insurers’ and reinsurers’ P&C reserve releases, he said. But with slight increases or even in a stable inflationary scenario, the picture could change, Schneider said.
“We at Munich Re with very solid loss reserve practices might be slightly better positioned than the sector average. But his profit source [prior-year reserve releases] may become less important for some competitors,” he noted.
“There is therefore limited room for further price reductions.
“This will add pressure to move the market towards more sustainable rates,” he noted.
During April renewals, rates deteriorated by 0.5 percent for Munich Re. This reduction was less pronounced than the negative 1.5 percent Munich Re experienced in the same period a year ago.
In the first quarter, Munich Re recorded a combined ratio in P&C reinsurance of 97.1 percent, a deterioration from the 88.4 percent in the first quarter of 2016.
The P&C reinsurance operations were marked by a significant increase in losses. Large loss claims were €400 million in the first quarter compared to €100 million in the same period a year ago.
The combined ratio was also impacted by a number of smaller losses which hit Munich Re in the US via its primary insurance operations.
“The first quarter appears to have recorded the largest natural catastrophe losses in 20 years,” Schneider said.
“A normalisation of large losses as seen to some degree in the first quarter contributes to market stabilisation. We saw this in the April renewals,” he noted.
The major loss ratio was 9.6 percent in the first quarter, up from 9.1 percent in the same period of 2016, but below expectation of 12.0 percent.
While major losses were still below average, the increase supported the combined ratio in the first quarter at Munich Re, together with reserve releases for previous years’ losses of €250 million or 6 percent of net earned premium, Schneider explained.
Overall, Munich Re made a profit of €557 million in the first quarter, a 27.7 percent improvement on the €436 million it made a year earlier. It also affirmed its profit guidance of €2.0–2.4 billion for the full year.
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