Reinsurers Expect Financial Storm Will Cause Premium Increases

October 28, 2008

The world’s reinsurers expect the intensifying financial market storm will allow them to push through higher prices for the risk cover they offer insurance companies.

The world’s No. 2 and No. 4 reinsurers, Munich Re and Hannover Re, on Monday predicted some business lines would see price increases of 10 percent or more in talks over the coming weeks to renew reinsurance contracts for 2009.

“We have come back to a ‘hard market’,” said Munich Re management board member Ludger Arnoldussen, referring to reinsurers’ strong pricing power in helping to shoulder the risks on the books of their insurance clients. “We expect significantly higher prices, with percentage increases definitely going into the double-digit range,” he said at a news conference in Baden-Baden, where reinsurers and their insurance company clients are meeting to hammer out contract terms.

Munich Re typically renegotiates about two-thirds of its worldwide property-casualty reinsurance business during the January Renewals, equivalent to €8.5 billion ($10.62 billion) in premiums last year.

Others predicted less dramatic strengthening of reinsurers’ pricing power. “We will see a rise,” agreed David Watson, head of European business at U.S. reinsurer XL Re. “There will be mark-ups in property/casualty business,” he told Reuters in an interview, adding that reinsurance prices were likely to move most in the U.S. market and only slowly in emerging markets such as Asia.

The financial market meltdown has prompted writedowns and drained investment income at insurers, siphoning off some of their equity capital base. This has increased the demand for and reduced the supply of reinsurance cover, industry players said.

Munich Re for months has been predicting that the fallout from the crisis would bolster reinsurance prices, but as recently as last month, when reinsurers convened in Monte Carlo for their annual discussion of the reinsurance market outlook, many industry observers predicted a further price decline.

“The Financial crisis has become much more dramatic since Monte Carlo,” said Jochen Koerner, regional head for middle Germany at the world’s biggest insurance broker Marsh.

In addition to the financial market woes, insured losses from disasters have also been significant.

Apart from Hurricanes Gustave and Ike, which have cost the industry at least $20 billion, there have been more than seven events costing more than $500 million each, Koerner said. “All those factors may lead to rising premiums prices, which the reinsurers will see first, and insurance company clients will see with a lag of perhaps a year or 18 months,” he said.

The broad effect of the financial turmoil and losses for the insurance industry will even begin to filter through to industrial and motor insurance in Germany, two areas that have been unable to resist downward price pressure in recent years. “We’ll probably see stagnation in the January 2009 renewals, followed by slight increases over the course of next year,” though individual accounts could still see some declines, Koerner said.

While many observers say reinsurers have a tendency to talk tough ahead of contract talks with insurance companies, investors are giving reinsurers the benefit of the doubt.

Munich Re’s shares have fallen 35 percent so far this year, while Hannover Re has fallen nearly 56 percent, but both have outperformed the nearly 60 percent decline in the DJ Stoxx index of European insurance shares. “The price of risk will rise,” Marsh’s Koerner said.

(Reporting by Jonathan Gould)

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