Insurance News

Munich Re, Swiss Re May Struggle to Increase Rates

Posted on: September 8, 2009

(Bloomberg) — Munich Re and Swiss Reinsurance Co., the world?s largest reinsurers, may struggle to raise prices for property and casualty coverage next year as an absence of costly disasters and a stock-market rebound restrain demand.

Reinsurers, which help insurers such as Allianz SE shoulder risks, gather in Monte Carlo starting tomorrow to begin talks with customers over January contract renewals. Discussions will continue at an October meeting in Baden-Baden, Germany.

In the Atlantic hurricane season, which runs from June through November and can drive reinsurance rates, no major storm has hit the U.S. coast so far this year. In 2008, Hurricane Ike slammed into Texas in September, costing the insurance industry $20 billion and helping push up reinsurance rates by about 8 percent this year following a two-year decline.

?Reinsurers will find it hard to argue for major rate increases next year as the 2009 hurricane season has been extremely quiet,? said Markus Engels, who helps manage about $440 billion at Allianz Global Investors. ?I would expect stable or slightly higher prices next year.?

A 52 percent rebound in the stock market since March, as measured by the MSCI World Index, helped replenish insurers? capital and may curb rate increases, said Moritz Rehmann, who helps manage about $12.4 billion at DJE Kapital AG in Munich.

Not at ?Mercy?

Shareholders? equity at Europe?s six biggest insurers by market value fell 23 percent last year, data compiled by Bloomberg show. In the first half of 2009, shareholders? equity rose by an average of 3 percent at Munich-based Allianz, Axa SA of Paris, Trieste-based Assicurazioni Generali SpA, Zurich Financial Services AG, and London-based Prudential Plc and Aviva Plc, the data show.

?Primary insurers are not as much at the mercy of reinsurers as they were a year ago,? said Ben Cohen, a London- based analyst with Collins Stewart. ?The third quarter looks to be another period of improvement.?

Moody?s Investors Service today lowered its outlook for the global reinsurance industry to ?negative? from ?stable? because the state of capital markets may make it difficult for companies to replenish funds, ?particularly when signs point to greater price competition in 2010.?

Fitch Ratings kept its outlook ?negative? on Sept. 2, stating that reinsurers may struggle to replenish losses should funds become drained by natural disasters.

Shares of Munich Re rose 0.1 percent to 104.50 in Frankfurt trading today, while Swiss Re lost 1 percent in Zurich.

?Flat? Rates

About two-thirds of property and casualty reinsurance contracts are typically renewed in January, and the remainder in April and July. Hurricane Katrina, which struck New Orleans in 2005, was the costliest storm, with $71.3 billion in insured losses adjusted to 2008 dollars, according to Swiss Re.

Guy Carpenter, the reinsurance unit of broker Marsh & McLennan Cos., said in a July report that U.S. reinsurance prices for catastrophe-prone segments were up 15 percent at midyear, almost double the 8 percent average for the broader property catastrophe reinsurance market.

?Rates haven?t fully recovered from the declines seen in 2008 and 2007,? said Chris Klein, global head of business intelligence at Guy Carpenter in London. ?Rates for property reinsurance as well as for casualty reinsurance are expected to be flat next year.?

Altered Outlook

Zurich-based Swiss Re, the world?s second-largest reinsurer, is taking a ?more cautious? view on renewal rates as well. ?There may not be as much upward pressure on rates and volumes as there was last year,? spokeswoman Simone Lauper wrote in an e-mail yesterday.

Improved financial markets, where pressure on the capital of primary insurers has diminished, and the low level of natural catastrophes so far this year altered the outlook, she said.

Ulrich Wallin, the chief executive officer of Hannover Re, the world?s fourth-biggest reinsurer, said in an August interview that reinsurance rates may stabilize in the absence of a major storm during the Atlantic hurricane season.

Munich Re, the world?s biggest reinsurer, is looking for rates to rise ?at least 3 percent to 5 percent to compensate for falling interest rates worldwide,? Chief Financial Officer Joerg Schneider said in June.

The Munich-based company expects that reinsurers? ?tight capacity should keep prices in capital-intensive business at a high level or, where capacity is reduced, even cause them to climb further,? the company said in its second-quarter report.

Denis Kessler, the CEO of Scor SE, France?s biggest reinsurer, told analysts on a July 30 conference call that he has ?a conviction that the positive pricing environment seen developing since last autumn is likely to continue during the rest of 2009 and probably into 2010.?

Warren Buffett?sBerkshire Hathaway Inc. may add to pressure on reinsurance rates by offering more coverage. The owner of the world?s third-biggest reinsurer is willing to sell more insurance for natural disasters, after pulling back on catastrophe coverage earlier this year, it said on Aug. 12.

Slackening demand for insurance amid the global economic slump may also rein in prices, said Stephan Kalb, a Frankfurt- based analyst at Sal. Oppenheim.

?I would expect reinsurance rates to move sideways or rise slightly next year, with the biggest increases seen in catastrophe-exposed segments,? Kalb said.

Some insurers may also choose to keep business on their own books, rather than farm it out to reinsurers. Allianz, Europe?s biggest insurer by market value, will probably buy less reinsurance from Munich Re next year, Chief Financial Officer Helmut Perlet told analysts on a conference call on Aug. 7.

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