Reinsurance prices fall on lack of storms-brokers

Jan 3, 2008

Reuters, 1/2/2008

(Reuters) – The cost of reinsurance has fallen after another relatively disaster-free year has likely led to large profits and increased pressure to cut prices, two of the world’s largest reinsurance brokers said on Wednesday.

Prices have fallen across the board in the important Jan. 1 renewals, when many major insurers renegotiate the cost and terms of their annual risk cover they buy from reinsurers.

Rates for property catastrophe reinsurance, which covers against perils such as hurricanes and earthquakes, are down 9 percent according to Guy Carpenter, the reinsurance unit of Marsh & McLennan Cos Inc. (MMC.N: Quote, Profile, Research).
This masked bigger price drops in the United States than in Europe, it said, with prices down on average by 10 percent for U.S. national programmes and 12 percent for U.S. regional programmes. Average price falls were 7.5 percent in the UK and 7 percent in continental Europe, it said, despite Hurricane Kyrill which buffeted northern Europe in January and the British summer floods. Although these cost insurers billions of dollars, they left reinsurers relatively unscathed.

The price cuts seem to show reinsurers have not heeded calls from leading players such as Swiss Re (RUKN.VX: Quote, Profile, Research) Munich Re (MUVGn.DE: Quote, Profile, Research) and Lloyd’s of London [LOL.UL] to remain disciplined, but have cracked under pressure from clients to lower prices.


Reinsurance prices skyrocketed after disasters such as the Sept. 11, 2001 attacks and a string of hurricanes in 2004 and 2005, including Katrina, the costliest ever hurricane, with an insurance bill of around $41 billion.

But the lack of costly disasters in the past two years, which means reinsurers are set to post big profits for a second year in a row, has intensified pressure on them to cut prices. ‘Despite many statements about the importance of cycle management, the industry is showing signs of reverting to its historic pattern of feast and famine,’ said Peter Hearn, CEO of Willis Re, the reinsurance arm of the world’s third-largest insurance brokerage Willis Group Holdings LTd. (WSH.N: Quote, Profile, Research).
But the traditional market cycle is likely to be less pronounced than it has been in the past, because reinsurers’ managers are more in tune with shareholders’ demands to generate high shareholder returns, rather than on boosting their revenues or capturing more market share, said Guy Carpenter.

The rate of price decreases has been markedly less steep than it was in the 1990s, said Guy Carpenter, while most prices remain at profitable levels.

The credit crisis sparked by problems in the U.S. subprime mortgage market has had no real impact on reinsurers, the brokers said. ‘Reinsurer impairment from the sub-prime debacle appears limited, and although losses are ultimately anticipated in specialty segments, such as Directors and Officers liability, conventional classes appear to remain well insulated from exposure,’ said Willis Re’s Hearn. (Reporting by Simon Challis, Editing by Erica Billingham)