Re-insurers to test the heat from pension fund rivals

Reuters

* 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 soontest the strength of competition from alternative investors likepension funds, whose activity may keep a lid on reinsuranceprice rises and add to challenges for a sector already facingcrimped investment income.

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

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

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

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

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

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

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

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

WALK AWAY?

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

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

At an industry meeting last month, reinsurers played downthe competition from alternative capital, saying it was narrowlyfocused 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 inthe traditional reinsurance market.

Alternative investor capital for natural catastrophe risk isset to rise to $75 billion, or 25 percent of the market, in2016, from $44 billion, or 17 percent, in 2012, Munich Re said.

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

There is more to come of such bonds, which shift risks likepayouts for wind storm damage to investors and free up insurercapital 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 toexpand the availability of the product beyond cat (naturalcatastrophe cover)," said Paul Schultz, a specialist inInsurance Linked Securities at Aon Benfield.

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

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