COMMENT: Reinsurers' wishful thinking

COMMENT: Reinsurers' wishful thinking

As ever, conversation at the Monte Carlo Rendez-Vous – the traditional start of European reinsurance renewals discussions, which took place this week – was dominated by pricing. The issue was whether the market would finally turn after a barrage of punishing losses so far this year in Japan, New Zealand, Australia and the US, which combined have caused an estimated $70bn of losses.

Despite tough talk from some, the answer is most likely: not yet.

Unsurprisingly, brokers tried their best to talk down rates. For example, Guy Carpenter’s CEO for EMEA operations Nick Frankland predicted European prices would be flat to down at the January 1 2012 renewals.

The surest sign that a broad increase in price is not in the offing came from reinsurers, however.  Not normally shy of trying to talk up markets, reinsurers did not sound overly convinced that prices will go up.

Mike McGavick, CEO of XL Group, said prices were not turning yet. “Our view of the market is it is the ‘not yet’ market. All the pre-conditions are in place,” he said at Monte Carlo’s official panel discussion, pointing to high cat losses, low investment returns, and an acceptance among underwriters that prices must go up.

This attitude that pricing must change was reflected in the talk from some at Monte Carlo. For example, Jon Turner, CEO of Brit’s reinsurance business, said: “Speaking as someone who runs a reinsurance business, if I were to turn around to my shareholders and say that the hideous loss activity we’ve seen in the first half of the year is not going to have an impact on pricing then I would lose my job.”

The problem is that it is not as simple as accepting that pricing needs to change. Many believe at least one more big event is needed to tip the balance in pricing, with Hurricane Irene nowhere near big enough to force a turn. Hiscox Bermuda CEO Charles Dupplin said one more landfalling windstorm in the US could ignite the market in time for the January renewals.

“The events in the first half of the year were not big enough to move the market sharply upwards, it needs another spark,” Dupplin told us in Monte Carlo. “The combination of leprous investment returns and losses so far has drained away excess capital in the market and the industry is running on empty. There is no prospect of fresh capital being created by profits – either on the underwriting side or from investments.”

Even those expecting price increases admitted that price changes were likely to be modest. But they did not seem too down about it.

“In general we are optimistic for renewals season that we will see improved pricing from what we have now, not a major shift in pricing outside loss-laden areas, “ Ulrich Wallin, CEO of Hannover Re, told us. “Rate increases will be gradual rather than dramatic.”

Another influential European reinsurer had other things on its mind than cats. Swiss Re told the assembled press and analysts at its Monte Carlo presentation that the threat from low interest rates is a far bigger danger than natural catastrophes have been in the past two years.

“Low interest rates have been the real shock for the industry over the last three years, and are far more significant than the 2010 to 2011 natural catastrophes,” said Brian Gray, chief underwriting officer at the reinsurer. “If not compensated by significantly lower combined ratios, earnings capacity of the industry will erode over time.”

Martin Sullivan, deputy chairman of Willis,also had macro issues on his mind. “If reinsurers face inflation and sovereign debt default together, all bets are off, as these events could still trigger a global hard market that will affect life, health, workers’ compensation, property and casualty insurance and reinsurance,” he said at a Monte Carlo breakfast briefing.

The other big issue at the meeting was model changes, and specially RMS’s update to its US wind model earlier this year. Version 11 of its model has greatly pushed up expected losses. The effect of the changes are so marked that many refer to the changes as “Hurricane RMS”, and  some believe the update is having a bigger effect than any of the actual cats so far this year.

Michael Watson, CEO of Lloyd's insurer Canopius, thinks that the growing influence of the modelling companies could simply be a case of every dog having its day. “A while back we saw the rating agencies having sway over the industry... maybe we are seeing something similar here with the modelling agencies,” he said. “And there is more to come yet, with European wind model updates.”

Other influential CEOs believe the industry is making too much of the RMS update. Tad Montross, chief executive of General Re, told us some people are overreacting.

“The cat models have changed after every major event,” he said. “They are just models and in my view the industry has become over reliant on them.”

It may also have become over-reliant on vainly waiting for a turn in price. This stodgy market may be around for a while, if not large catastrophes hit in the rest of the year.

PDFs of our daily newsletter in Monte Carlo can be downloaded here.


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