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Rates must improve as sector struggles to meet cost of capital: Swiss Re CEO

1st November 2018 - Author: Luke Gallin

Reinsurance giant Swiss Re has underlined the need for further rate improvements across the property and casualty (P&C) industry as the sector continues to struggle to earn its cost of capital.

Swiss ReFollowing years of declining rates and a soft market environment, rates in the highly competitive P&C sector increased at the January 2018 renewals on the back of 2017 catastrophe events.

However, competition remained intense from both alternative and traditional sources, and, the dampened rate increases seen at 1/1 persisted throughout the year and industry noise underlined disappointing rate movements at the April renewals, which have apparently continued to fade through the year.

“We observe that the P&C insurance industry globally is struggling to earn its cost of capital. It seems that the industry has reached an inflection point and non-life insurance prices are hardening modestly in the major markets; however our latest sigma research shows that underwriting margins need to further improve to ensure sustainable returns on equity for shareholders,” said Christian Mumenthaler, Chief Executive Officer (CEO) of Swiss Re as part of the reinsurer’s Q3 2018 earnings release.

The need for improved rates was echoed during the firm’s media call held this morning, when Chief Financial Officer (CFO) John Dacey stressed the need for “continued price increases,” and again noting that the P&C industry has reached an “inflection point.”

Dacey did add that while catastrophe losses in 2018 haven’t been as high as in 2017, and are therefore less likely to positively impact rates, there is a general expectation that reinsurance pricing should be stable at least, if not increasing at the January renewals.

Despite industry wide losses from Q3 2018 events falling way below that driven by the events in 2017, companies have still felt the impact, and Mumenthaler commented on the Q3 cats.

“During the third quarter, we once again witnessed a series of natural catastrophes and large man-made disasters that devastated lives and disrupted businesses, particularly in Japan and in the US. The situation continued to be challenging in the US, with the landfall of Hurricane Michael in October. Our sympathies go out to people affected by all of the events of the past months.

“In these tough times, we have the financial strength to support our clients, and ultimately their customers. This demonstrates the value we can bring by swiftly paying claims to help people and businesses get back on their feet following such catastrophes.”

The reinsurance giant today reported a positive nine-months start to the year, despite the impacts of natural catastrophe and man-made losses in the third-quarter of 2018.

According to the reinsurer, its research shows that rates in the P&C sector must improve further if sustainable returns for shareholders are going to be achieved.

During the media call, Dacey did highlight some areas where pricing is hardening in certain lines, including corporates markets in Australia, some loss-affected lines in the U.S., and he also said that the firm expects some hardening in Japanese reinsurance rates over the next year following recent events there.

It remains challenging times for reinsurers of all shapes and sizes, but Swiss Re’s results show that its scale enables it to offset challenges better than others in the market, underlined by its positive result in spite of major nat cats and man-made losses in the quarter.

What happens to rates at 1/1 2019 remains to be seen, but with competition high and an abundance of available capacity from traditional and increasingly alternative, or third-party providers, combined with losses most likely insufficient to have an impact, the January renewals season could be challenging for some, if not most of the industry.

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