Reinsurers eye steady prices and play down rival threat

By Jonathan Gould

BADEN-BADEN, Germany, Oct 21 (Reuters) - Munich Re and Hannover Re expect their pricing power to be undiminished when renewing risk cover contracts with insurers in coming weeks, playing down the threat of competition from pension funds offering to provide cover.

Munich Re, the world's biggest reinsurer, said it was well positioned for negotiations with insurance companies for new contracts that take effect on Jan. 1.

"Munich Re expects prices ... to remain largely stable," board member Ludger Arnoldussen told a media briefing at the southern German spa resort of Baden-Baden, venue for planned talks between the two sides.

Many observers have suggested reinsurance prices would come under pressure in 2014 as pension funds, seeking higher returns at a time of low interest rates, enter the market to provide backup cover on major risks such as storms and earthquakes.

Monday's comments from reinsurers, which provide a financial backstop against big claims from such events in exchange for part of the profit, echo remarks they made last month.

Yet Munich Re has also previously estimated that "alternative" capital from the likes of pension funds to cover natural catastrophe risks is expected to rise to $75 billion dollars or 25 percent of the market for that risk in 2016, from 17 percent last year.

Broker Willis Re said the increasing supply of reinsurance cover was helping create a buyer's market for European insurance companies.

Insurance categories that have not seen major losses are likely to see prices fall by 5 to 10 percent in property-catastrophe business, said Willis Re International Chief Executive Tony Melia.

But reinsurers said prices in Germany, Europe's largest market, would reflect loss claims for flooding and hail storms in June and July which cost insurers billions of euros, much of which they passed on to reinsurers.

"I would expect prices to reflect the loss experience, so (I would expect) an upward movement in prices," Arnoldussen said.


While some insurers had very high local exposure to the hail storms and were hit particularly badly by claims, Arnoldussen said the event was likely to prompt a wider review by insurers of the amount of reinsurance cover they buy.

Munich Re itself has pencilled in claims of 180 million euros ($247 million) for the hail storms in late July, of which 160 million was allocated to its reinsurance business and 20 million to its insurance unit Ergo.

For the June floods, Munich Re sees its share of insured damage at 230 million euros, with a hit of 180 million in reinsurance and 50 million at Ergo. It is due to update the figures with its third-quarter results on Nov. 7.

Pension funds have had a significant effect in the U.S. reinsurance market, particularly for covering risks such as hurricanes in Florida.

"In European markets, I think this is going to be limited," Anoldussen said, mainly because the relative price level for reinsuring European wind storm risks was much less attractive than U.S. wind storm exposures.

"The U.S. is basically the home turf of alternative capital," Anoldussen said. "There will be some effects in other peak exposures as well but to a much lesser extent."

Michael Pickel, a board member at Hannover Re, also played down the threat from alternative capital investors, saying it would probably remain restricted to natural catastrophe risks such as wind storms.

"You have to be able to model it," he said, referring to the sophisticated mathematical models the industry uses to assess risks and determine prices.

Other reinsurers at the Baden-Baden meeting agreed, noting many small and medium-sized insurers saw the advice and service they get from reinsurers over the long term as at least as important as price in buying reinsurance cover.

Forecasts of the impact of alternative capital were overblown, said one reinsurance executive. "The hype we have right now is temporary," he said.