Reinsurers eye steady prices and play down rival threat

Reuters

By Jonathan Gould

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

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

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

Many observers have suggested reinsurance prices would comeunder pressure in 2014 as pension funds, seeking higher returnsat a time of low interest rates, enter the market to providebackup cover on major risks such as storms and earthquakes.

Monday's comments from reinsurers, which provide a financialbackstop against big claims from such events in exchange forpart 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 covernatural catastrophe risks is expected to rise to $75 billiondollars or 25 percent of the market for that risk in 2016, from17 percent last year.

Broker Willis Re said the increasing supply ofreinsurance cover was helping create a buyer's market forEuropean insurance companies.

Insurance categories that have not seen major losses arelikely to see prices fall by 5 to 10 percent inproperty-catastrophe business, said Willis Re InternationalChief Executive Tony Melia.

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

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

LOCAL EXPOSURE

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

Munich Re itself has pencilled in claims of 180 millioneuros ($247 million) for the hail storms in late July, of which160 million was allocated to its reinsurance business and 20million to its insurance unit Ergo.

For the June floods, Munich Re sees its share of insureddamage at 230 million euros, with a hit of 180 million inreinsurance and 50 million at Ergo. It is due to update thefigures 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 ashurricanes in Florida.

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

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

Michael Pickel, a board member at Hannover Re, also playeddown the threat from alternative capital investors, saying itwould probably remain restricted to natural catastrophe riskssuch as wind storms.

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

Other reinsurers at the Baden-Baden meeting agreed, notingmany small and medium-sized insurers saw the advice and servicethey get from reinsurers over the long term as at least asimportant as price in buying reinsurance cover.

Forecasts of the impact of alternative capital wereoverblown, said one reinsurance executive. "The hype we haveright now is temporary," he said.

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