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Reinsurers unlikely to earn back 2017 catastrophe losses: Deutsche Bank

2nd July 2018 - Author: Luke Gallin

Deutsche Bank equity analysts have suggested that global reinsurance companies are unlikely to earn back 2017 catastrophe losses as a result of insufficient rate increases at the January, April and June renewals, with further disappointment expected through July.

GrowthDeutsche Bank analysts recently met with management of global reinsurance giant Munich Re, with much of the focus around the highly competitive and pressured property and casualty (P&C) sector.

Following discussions with the reinsurer, analysts state that they still view pricing as a structural issue and warned that the firm’s 2020 target depends on at least stable pricing.

Furthermore, analysts warn that insufficient and disappointing rate increases at the June renewals, something that is expected to persist through July, “will be insufficient to earn back last year’s significant EUR2.7bn in hurricane losses for the company.”

Of course, the above is specific to Munich Re, but by no means are the Germany-based reinsurer’s 2017 catastrophe losses outsized when compared with the rest of the marketplace, so, it’s safe to say that the expected inability to earn payback from last year’s events applies to many reinsurers operating in the intensely competitive and overcapitalised P&C industry.

Stratumn, by SIA Partners

Rates did improve at the January renewals on the back of one of the costliest loss years ever for the global insurance and reinsurance industry, but the growing influence of alternative capital resulted in muted increases, a trend that continued through the April renewals and into the mid-year, with movements in July expected to be much of the same.

June renewals were seen as disappointing (small in group context though). Wording for July seemed to be unchanged, i.e. loss-affected lines seeing single-digit increases, loss-affected Caribbean business rate increases of 20-30% and no-loss-affected lines broadly flat,” explained analysts. 

As a result, analysts believe it will be challenging for even the likes of Munich Re to earn back 2017’s catastrophe losses.

Current reinsurance market dynamics suggest that any price stability is unlikely anytime soon, absent a truly staggering level of catastrophe losses, and, with analysts’ stating that Munich Re’s 2020 target is dependent on “certain price stability”, they have taken a cautious view on the firm’s 2020 vision.

And again, the profit warning is applicable to the wider reinsurance sector and not just Munich Re, with July renewals expected to be disappointing and the supply / demand imbalance persisting, suggesting market players will likely need to significantly improve efficiency or that the market needs higher pricing if companies are going to meet their profit targets over the next two to three years.

Clearly, conditions remain challenging for reinsurers and despite the impacts of 2017 events, it’s unlikely that any market stability will last for long. Companies will most likely need to further embrace the rise of technology and utilise the growing base of alternative, or third-party capital to augment their operations.

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