Darker economic clouds are gathering over the world’s reinsurers as they travel to the Mediterranean coast this weekend to kick-off crucial pricing discussions with their insurance clients in Monte Carlo.
Reinsurers should fly down to the south of France in buoyant mood. Their balance sheets are at their strongest levels in years, while they have enjoyed bumper profits thanks to a combination of no major catastrophes since 2005 and strong investment returns.
They have also escaped unscathed from Hurricane Gustav, which swirled away from highly-insured coastal cities such as New Orleans and oil rigs in the Gulf of Mexico. Insured claims from the storm are estimated to be between $4.3 billion and $10 billion — a fraction of 2005′s Hurricane Katrina, which cost insurers $41 billion.
Prices for the risks they assume from insurers are falling, but from the highest levels many in the industry have ever witnessed, after hurricanes Katrina, Rita and Wilma wreaked devastation in 2005 and caused reinsurance prices to shoot up.
But reinsurers will arrive in Monte Carlo in uncertain mood. Turbulence on the investment markets has wreaked havoc on their earnings, with market-leader Munich Re having already dumped its full-year earnings target due to the volatility.
While reinsurers have survived the credit crunch much better than banks, the crisis has hurt the sector.
Investment losses have shaved their capital but also severely reduced their ability to raise fresh cash quickly following costly disasters, putting their plans to return further excess capital to shareholders in jeopardy.
Meanwhile, their growth prospects look uncertain as reinsurers find themselves facing a dilemma.
Their insurance clients are clamouring for price cuts, citing the absence of costly disasters to justify continued high prices.
Reinsurers have, on the whole, resisted this pressure so far; prices have fallen, but not by too much.
Irritated at their reinsurers’ unwillingness to soften their stance, particularly for catastrophe risk cover, some insurers are simply deciding not to use reinsurers.
This will severely test reinsurers’ resolve, particularly as the slowing global economy means their revenues are likely to stall over the next couple of years.
Reinsurers, such as Munich Re, Swiss Re, Scor and Hannover Re, have all trumpeted their willingness to walk away from poor-quality risks that are underpriced. But analysts ask, will reinsurers be prepared to watch good business walk out of the door too?
Firms are under severe pressure from analysts and investors to keep their prices high, however, to sustain recent attractive returns and to demonstrate they have abandoned the boom-and-bust cycle that saw earnings wax and wane for decades.
Reinsurers have enjoyed unprecedentedly low claims in recent years, but analysts fear a sudden spike in losses could catch reinsurers and expose the folly of their recent willingness to let some prices fall as competition hots up.
It isn’t just the economic skies that are darkening either. As they meet in Monte Carlo, Hurricanes Hanna, Ike and Josephine churn their way across the Atlantic. Their outcome is likely to dictate the tone of the meetings in the cafes, restaurants and hotels that surround Monte Carlo’s Casino Square.
If the storms slam the southeastern United States, causing tens of billions of dollars in damage, reinsurers will see a rush of new business and will succeed in keeping prices steady.
But if the hurricanes peter out before reaching the United States, it will pile the pressure on reinsurers from increasingly disgruntled clients to cut their prices.