Reinsurers Eye Innovation As Prices Disappoint

By | September 12, 2011

Catastrophe claims totaling $70 billion have failed to generate a hoped-for upturn in reinsurance prices, putting the industry under pressure to specialize and develop new products to generate growth.

Reinsurance policy prices look set to stay broadly flat when customers renew on Jan 1, halting a four-year decline and dashing hopes of a rapid rebound in the sector’s lame duck shares, attendees at the industry’s biggest annual conference said.

“The primary driver of the low valuations in the industry is pricing power,” said Kevin Lee, senior credit officer at rating agency Moody’s. “Investors are still very much focused on the pricing outlook. Unless the pricing outlook improves significantly, valuations are likely to remain low.”

Reinsurance shares are mostly trading below book value, having fallen steeply over the past three years as stiff competition between well-capitalized reinsurers weighed on prices and crimped profits.

This year’s natural catastrophes, led by the March 11 Japanese earthquake, have put a big dent in the sector’s earnings, but have not prompted a mass retrenchment by weaker reinsurers which would free stronger peers to push through big price increases.

“If the wind does not blow and the earth does not shake (by year-end), we think that property catastrophe rates will be going up something like 10 percent, but for the rest of the portfolio, if we hold it flat I think we will have done well,” Stephen Catlin, chief executive of Catlin , operator of the biggest syndicate at Lloyd’s of London, told Reuters.

This year already ranks as the second most destructive on record for catastrophe losses, with insurers absorbing $70 billion in claims in the first half, Swiss Re , the world’s second-biggest reinsurer, said this week.

The impact on reinsurance prices has been mitigated by a relatively low level of reinsurance cover among primary insurers, leaving them to bear the brunt of the losses.

Increased availability of short-term capital through instruments such as so-called “sidecars”, specially-created reinsurance subsidiaries funded by outside investors, have also blunted the industry’s traditional pricing mechanism.

In the absence of profit-boosting price rises and with investment income under pressure amid rock-bottom interest rates, reinsurers may pursue growth by finding ways of covering new risks thrown up by changing economic conditions.

These include disruption to complex manufacturing supply chains as economic power shifts eastwards, and the risk posed to pension funds in the developed world by lengthening average lifespans, said Achim Bauer, an insurance partner at PricewaterhouseCoopers.

“This creates a totally new risk environment and I have seen very little evidence that reinsurers are starting to pick up on this,” Bauer said. “It is about taking the skill set that the industry has to those risks that will matter in the future.”

(Reporting by Myles Neligan; Editing by Dan Lalor)

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