Reinsurance rate hardening to continue, especially for long-term risks

Reinsurers are forecasting increased rate hardening and tougher terms and conditions for 2021, particularly for European markets and for long-term risks, as low interest rates impact the profitability of reinsurers. Munich Re said it expects a further hardening of markets. “Following years of eroding rates caused by excess capacities and low major-loss expenditure, particularly in European markets, low interest rates – likely to remain even lower for even longer due to the coronavirus pandemic – are impacting the profitability of reinsurers. Insurance covers are therefore likely to become more expensive, particularly for long-term risks in third-party liability and other lines,” said the reinsurer. It noted that interest rates have dropped to record lows once again in 2020 and, against the backdrop of the coronavirus crisis, “it is increasingly likely that the current interest-rate environment will continue to affect low-risk investments for the foreseeable future”. “These circumstances mean that sustained profits, in long-tail business and elsewhere, will only be possible if prices match the assumed risks,” added Munich Re. Doris Höpke, member of the board of management responsible for Europe and Latin America, Munich Re, said: “Interest rates will remain low for quite some time. In turn, income for insurers must come from risk assumption itself, and that includes long-tail business. Relying on interest income, or hoping that statistically likely losses will not occur, is an unsuitable basis for the long-term assumption of major risks. We want to support our clients reliably and in the long run with our financial capacity and our knowledge of risks. We devote considerable attention at Munich Re to sound underwriting as well as appropriate prices, terms, and conditions.” E+S Rückversicherung, the Hannover Re subsidiary responsible for the group's German business, said it expects rising prices and improved conditions overall for the coming year in property and casualty reinsurance on the German market. It added that demand for reinsurance coverage from financially robust providers will continue to grow against the backdrop of the Covid-19 pandemic. “Along with the direct impacts of the pandemic, the renewed decline in interest rates is taking a toll on insurance industry profits. Price increases at primary insurers are therefore absolutely essential and adjustments are also needed on the reinsurance side,” said Dr Michael Pickel, chief executive officer of E+S Rück. In industrial and commercial business, E+S Rück noted that industrial fire insurance has for the most part been loss-making in recent years. “While the remediation efforts undertaken by primary insurers are starting to make themselves felt, the economic downturn triggered by the Covid-19 pandemic is nevertheless having a clearly negative impact. Taken together with the effects of business closures and slumps in demand, the need for remediation in commercial and industrial property lines therefore continues to grow more pressing,” it said. Munich Re said the pandemic “serves as a stark reminder that we must always properly assess and manage low-probability risks that bear tremendous loss potential”, adding: “This is especially true of risks that are exposed to an underlying deterioration – as is the case with certain natural disasters made worse by climate change. Recent experiences following the lockdown of public life and the business world in many countries have been a wake-up call regarding the staggering potential for systemic risks to result in losses that subsequently trigger many different repercussions.” The reinsurer added: “Yet it is by definition impossible to insure risks that lead to losses everywhere at the same time, thus violating the fundamental criterion of insurability.” E+S Rück said that it supports partnership-based solutions with the participation of public and private actors for the coverage of systemic risks such as pandemics. “It can therefore be anticipated that primary insurers and reinsurers alike will define the coverage of pandemics more clearly in their new contracts,” it added.

Reinsurance rate hardening to continue, especially for long-term risks

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