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Categorized | Insurance

Falling reinsurance prices spark concern


Posted on December 31, 2014

An AirAsia Bhd. aircraft takes off at Soekarno-Hatta International Airport in Cengkareng, near Jakarta, Indonesia, on Monday, Dec. 29, 2014. Planes and ships from four nations scoured the Java Sea for an AirAsia passenger jet that vanished off the coast of Borneo more than a day ago with 162 people on board, as Indonesian investigators said the jet had likely crashed to the bottom of the sea. Photographer: Dimas Ardian/Bloomberg©Bloomberg

A third straight year of falling prices for back-up insurance against earthquakes, hurricanes and other catastrophes is raising concerns about the business models of the global reinsurance industry.

Tough competition has forced reinsurers to reduce premiums even in areas hit by big claims such as aviation. Insurers face their costliest annual bill for this area since 2001 following a series of disasters including the loss of the AirAsia jet this week.

    Rates for political risk cover have also come under pressure in spite of the threat of losses from rising instability in Russia, among the largest markets for such insurance.

    Brokers said prices for some types of protection, such as UK property catastrophe reinsurance, have come down to their lowest levels since the early 1990s.

    Premiums are being depressed because of a relative absence of costly natural disasters and also because reinsurers face new competition from non-traditional sources. Yield-hungry investors are buying “insurance linked securities” such as catastrophe bonds, an alternative to traditional reinsurance.

    Overall, rates for natural catastrophe protection — traditionally a main source of profits for reinsurance groups — have dropped about 10 per cent for new policies taking effect January 1, according to a report to be published by the broker Willis Re this week.

    However, the scale of the price reductions is not as large as last year. James Vickers, chairman of Willis Re International, said this was partly because insurers were not simply picking the cheapest reinsurance deal as they grow increasingly wary of cut-price offerings.

    “If you’re going to be asking a reinsurer to pay a claim in 10 years, you want to make sure it’s still around,” he said. “They [insurers] wish to maintain sustainable relationships.”

    Although the lack of catastrophes in recent months has supported profits and share prices, regulators and rating agencies are becoming more concerned about how well prepared the industry will be for a costly calamity.

    Moody’s predicted this month that reinsurance company returns were likely to be squeezed in 2015 to “near or below the industry’s cost of capital”. Larger groups such as Munich Re and Gen Re, part of Warren Buffett’s Berkshire Hathaway, were better placed than their less diversified peers, the rating agency added.

    10%

    drop in rates for new policy natural catastrophe protection

    Bankers are predicting a flurry of takeover bids in the sector, particularly for catastrophe reinsurance specialists that operate in Bermuda and syndicates at the Lloyd’s of London market.

    New York-listed XL is continuing talks with Catlin over the terms of its planned acquisition of the FTSE 250 company, which would be the largest ever purchase of a Lloyd’s insurer. The two sides hope to reach an agreement early in the new year.

    Willis Re added that for many reinsurers, “their only sustainable course of action is to change their business models, portfolio mixes and to strive for scale so they cannot be ignored by buyers”.

    In a sign that a price floor may be being reached, Willis Re said some reinsurers had become increasingly less willing to write business at the lower prices. “This is particularly true of natural catastrophe, where some reinsurers have declined offered terms on some placements with thin margins as a step too far.”

    “Many reinsurance underwriters are also going into 2015 with reduced budgets, which helps them resist overly aggressive pricing and terms and conditions,” Willis Re added.