Re-insurers to test the heat from pension fund rivals

October 18, 2013

* Re-insurers, insurers start talks on contracts for 2014

* Pension fund capital may dampen prices in Europe

* Big inflows of insurance capital expected in next years

By Jonathan Gould

FRANKFURT, Oct 18 (Reuters) - Europe's reinsurers will soon test the strength of competition from alternative investors like pension funds, whose activity may keep a lid on reinsurance price rises and add to challenges for a sector already facing crimped investment income.

Reinsurers, including the world's top three players Munich Re, Swiss Re and Hannover RE,

gather over the weekend in the German resort of Baden-Baden for annual contract talks with insurance companies, whom they help cover the cost of disasters in exchange for part of the profit.

They meet after flooding in central Europe in June and hailstone damage in southern Germany in July prompted more than a million claims. According to a trade body, the sector faces a cost of about 4.5 billion euros ($6.2 billion) in Germany alone.

Such events would normally lead insurers and reinsurers to raise prices, but a supply of insurance from alternative sources like pension funds, which have been seeking higher yields by pouring money into investment vehicles that supply reinsurance, could hinder those efforts.

"We are currently seeing only moderate price increases in the property business, which certainly is an indirect effect of the supply of new risk capital flowing into the market," said Georg Braeuchle, managing director at insurance broker Marsh .

"There are certainly insurers who have their backs against the wall and who are demanding much higher premiums, but they will have to give away those risks because other market players are ready to write the business on the same terms or are willing to accept a lower price increase," he added.

Alternative reinsurance has fared particularly well in the high-margin market for U.S. hurricane risks, where traditional reinsurance premiums have consequently slid.

As well as displacing some traditional reinsurance business, the knock-on effect has also been to shift supply of risk-cover to Europe, putting downward pressure on prices.


WALK AWAY?

While reinsurers insist they would rather let business walk away than accept prices that were too low for the risks they cover, the stakes in the coming weeks are high.

Munich Re renews about half of its 17 billion euro property-casualty book on Jan. 1 each year, with the Baden-Baden talks playing a key role. Hannover Re renews about two-thirds of its nearly 6 billion euro book on Jan. 1.

At an industry meeting last month, reinsurers played down the competition from alternative capital, saying it was narrowly focused and possibly of limited duration.

But they have also been forced to play the game as well, often organising the bond issues that have undercut profit in the traditional reinsurance market.

Alternative investor capital for natural catastrophe risk is set to rise to $75 billion, or 25 percent of the market, in 2016, from $44 billion, or 17 percent, in 2012, Munich Re said.

Strong investor interest helped the second biggest European insurer, Axa, this week place 350 million euros in catastrophe bonds, the biggest issuance in euros of such paper.

There is more to come of such bonds, which shift risks like payouts for wind storm damage to investors and free up insurer capital for underwriting. Broker Aon Benfield expects $100 billion of alternative capital over the next five years.

"In order to deploy $100 billion, we are going to have to expand the availability of the product beyond cat (natural catastrophe cover)," said Paul Schultz, a specialist in Insurance Linked Securities at Aon Benfield.

"It is inevitable that we are going to see capital flow into other types of insurance and reinsurance risks, namely liability and casualty, in addition to cat."