A downward slide in reinsurance prices showed clear signs of accelerating in April contract renewals and is likely to feed through to property/casualty insurance prices before long, broker Willis said this week.
Reinsurers have seen prices fall by up to 20 percent when renewing contracts with Japanese insurance companies that take effect on April 1, with declines likely to be even larger in U.S. contract renewals later in the year, said James Vickers, Chairman of Willis Re International.
“Prices are falling pretty much everywhere, driven by too much supply of capital chasing too little demand,” Vickers told Reuters.
“We don’t see anything on the horizon that is going to put a brake on this at the moment,” he added.
Capital market investors such as pension funds, looking to garner higher returns than they can find on government or corporate bonds, have been pouring money into the market for natural catastrophe reinsurance and driving down prices there.
Separately, insurance companies are demanding price cuts on reinsurance after relatively low payouts for natural catastrophes last year helped reinsurers post bumper results.
Reinsurers such as Munich Re, Swiss Re and Hannover Re act as insurance companies to insurance companies, taking on part of insurers’ risks for storms or earthquakes, for example, in exchange for part of the profit.
“If there are no big losses in the rest of 2014, despite prices coming down, reinsurers would still do very well,” Vickers said, adding that this could leave room for reinsurers to raise dividends or buy back their own shares as they did last year.
It is not clear how much further prices have to fall. The industry crunches vast amounts of data on the construction and value of houses or factories, comparing it with the strength of possible storms or floods, to set the price for insurance cover.
“The models tell you the potential for a big loss is getting bigger every year, as people build their houses closer to the coast, for example,” Vickers said.
“The models should be in position to provide some sort of floor,” he added.
In the meantime, insurance companies are benefiting from the drop in reinsurance prices worldwide, which frees up capital for other uses, including lowering their own insurance prices to protect or win market share.
“Inevitably, one or two will use it to reduce their prices and so others will probably have to follow them down,” said Vickers.
(Reporting by Jonathan Gould; Editing by Pravin Char)