Disconnect between soft market trend and individual reinsurer’s experience the big conundrum of renewals

Over the past month, the likes of Munich Re, Hannover Re, SCOR and Swiss Re have trumpeted their positive renewal results, pointing to increases in volumes and, despite a soft market environment, broadly stable rates. Mr Hawkins of Keefe, Bruyette & Woods Ltd in London said the conundrum—which has been seen for the past few years—is that the major reinsurers acknowledge that it has been a competitive renewal environment, with rates down around 5%, ‘but few reinsurers actually acknowledge that they are the ones suffering from that rate cut within their portfolio. “Mathematically I do not understand how most players in the market can acknowledge that rates are down 5%, but all of the main underwriters say their portfolios are renewing about flat,” he said. hideSome reinsurers argue that those who believe rates are down 5% or more are primarily the brokers who are basing the view on the non-proportional broker-led business. While in fact rates for proportional direct business—where the brokers are not involved—are holding steady. Mr Hawkins views that explanation as ‘vaguely sensible’. Yet this phenomenon was not witnessed two or three years ago when the primary market was facing its steepest price competition, he adds. Other observers note that insurers and reinsurers record rate movements by what they renew, while the price declines may actually be in business that they turned down. In writing new business, they will never know exactly the price at which that risk was written the previous year. “There is always a tendency for the insurers and reinsurers to underestimate price movements, particularly on the downside,” said Ben Cohen, an analyst with Collins Stewart, an independent financial advisory group. Which companies are actually ‘suffering’ from the apparent market decline has been much discussed at the recent spate of reinsurer conference calls. Munich Re’s reinsurance chief executive officer Torsten Jeworrek said he shared the view of Hannover Re that claim free non-proportional business for the market was down 5% to 10%, although including the proportional business the declines were ‘2 or 3 to 5%’. Asked directly who was suffering the 5% to 10% losses, Mr Jeworrek said it “depends on where you look for the suffering,” noting that “reinsurers who are active in the non-proportional disaster business on a regional basis are faced with higher price pressures.” “As a rule, somebody has to be picking these rate declines up,” said Mark Coleman, Standard & Poor’s lead analyst for ratings in the European reinsurance sector. If the major European reinsurers that dominate the market are not seeing 5% to 10% decreases, then either “the broker reports are wildly wrong or the rest of the market is taking a much bigger bath,” Mr Coleman said. “I actually think there is a disconnect between the reports that are coming out at the market level and the actual renewal experience of the incumbents,” said Mr Coleman, adding that there is a different picture between risks with losses and those that are claims free. “I am not always sure that the brokers’ [view] is a risk-adjusted view,” he said. “But certainly, in terms of the visibility that we have from our client’s portfolios, their message to us is that it is not the headline 5% to 10% we see, it is a much smaller single digit number—if at all.” Despite the stable rates, reinsurers did report prices hardening in segments and contracts with above average loss levels. Hannover Re, for example, said double-digit price increases were booked under loss-impacted programmes, such as in Chile, where prices climbed by up to 40% following the devastating earthquake last February. Munich Re was among those heavily impacted by natural catastrophe losses in 2010, with losses amounting to €1.56bn, up from just €200m a year earlier. In the fourth quarter, the largest individual loss was the flooding in north-eastern Australia, with claims of around 270m. As a result, rates during the renewals rose markedly for natural catastrophe covers in Australia, New Zealand and Chile, Munich Re reported. And, like Hannover Re, Munich Re said its rates in the offshore energy sector also increased due to the ‘Deepwater Horizon’ oil spill in the Gulf of Mexico. As for the financial health and security of Europe’s top reinsurers, most have strong balance sheets and adequate reserves, analysts said. Look out for the full version of this story in March’s issue of Commercial Risk Europe.

Disconnect between soft market trend and individual reinsurer’s experience the big conundrum of renewals

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