Reinsurers are running out of claims reserves that they can release to boost profits as pricing continues to fall, according to the head of Allianz SE’s reinsurance unit.
“I don’t think there are too many loss reserves left and the natural-catastrophe bill can’t remain low forever,” Allianz Re Chief Executive Officer Amer Ahmed said in an interview in Munich. The buffers from business written in the past have been used to bolster industry profits as low interest rates deplete investment returns.
Prices that reinsurers charge to backstop claims from hurricanes, earthquakes and other disasters declined in eight of the last 10 years, according to the Guy Carpenter World Property Catastrophe Rate on Line Index. While losses from natural catastrophes fell to the lowest since 2009 last year, depleted prices as well as declining reserve releases are weighing on earnings in the industry.
‘No Turnaround Yet’
“While I don’t think the market can go much further in terms of rate reductions, I don’t see a turnaround yet and there may be continuing reductions in the low single-digit percent range,” Ahmed said.
Annual reinsurance contracts are typically renewed at the start of January, April and July. Munich Re, the world’s second-biggest reinsurer, said earlier this month that the rates it charges customers for non-life reinsurance contracts renewed in January declined about 1 percent. That compared with a drop of 1.3 percent a year earlier. Munich Re said it doesn’t expect the market to change significantly in April or July.
Hannover Re said Feb. 3 that the “rate erosion has no implications” for its 2016 profit target, which is the same as the one set for 2015. Munich Re has said it may report a lower profit for this year because of low investment yields and rates.
“Reinsurers are still generating positive returns as low natural catastrophe claims and reserve releases from business written in the past are helping offset depleted investment returns,” Ahmed said.
Allianz Re canceled some contracts with customers last month, reflecting the challenging market and continuing price competition. “Although this wasn’t to a big extent, it was tough because we have invested a lot in building core strategic relationships,” Ahmed said.
Allianz Re generates more than 80 percent of its income by selling reinsurance to Allianz’s units. It also sells reinsurance to other insurers.
The company, which employs about 500 people, reported operating profit of 517 million euros [$570.3 million] in the first nine months of last year, up from 430 million euros [$474.3 million] a year earlier.