Financial crisis increases demand for reinsurance
The global financial crisis has helped spur demand for reinsurance as insurers face the twin fronts of increased severe weather activity and declining investment income.
Ludger Arnoldussen, Munich Re Group Board Member with responsibility for Germany, Asia-Pacific and Africa, spoke with insuranceNEWS.com.au today during a visit to Sydney.
He says more local insurers could ramp up their reinsurance programs to mitigate risk as insurers face severe weather claims in addition to declining investment results.
In February, Suncorp reduced its exposure to natural catastrophes in the wake of rising claims associated with severe weather, with a $15.2 million retention buydown program.
The reinsurance against first-half hail, storm and bushfire events reduced Suncorp’s maximum event retention to $100 million, dropping to $50 million for further loss.
While other Australian insurers haven’t rushed to follow suit, it’s a strategy that is likely to be on the table during coming renewals.
“I wouldn’t be surprised,” Dr Arnoldussen said. “In the Australian market we are not seeing that yet, but should they encounter solvency issues then certainly that is likely to be the case. There is more need for reinsurance right now with an increased focus on security and avoiding unnecessary risk.
“In Australia during the last few months you have had an increased number of natural catastrophe claims and man-made losses.”
It’s a topsy-turvy time for reinsurers such as Munich Re. While the financial crisis has spurred demand for reinsurance and led to rates firming across the globe, they have like any other company been at the mercy of the financial elements.
Munich Re’s own results tell the story. Though the company recorded a record profit last year, it has had to withstand a €352 million ($699 million) burden from man-made losses in the first half of this year, against just €71 million ($141 million) in the corresponding period last year.
Third-quarter profit was just €12 million ($24 million), against €1.2 billion ($2.4 billion) last year. And the nine-month operating profit has declined 39% to €2.4 billion ($4.8 billion), while investment profit slumped 48% to €3.9 billion ($7.8 billion).
“There has been a decline in equities for the first nine months on the investment side, and you cannot evade that,” Dr Arnoldussen said. “Since the beginning of the year we have however reduced the potential impact.”
Munich Re abandoned its full-year earnings forecast of €2 billion ($4 billion), blaming ongoing volatility. It has also reduced its exposure to equities from around 10% of earnings to less than 5%.
The giant German reinsurer rated third-quarter reinsurance results “satisfactory” despite major losses, including €390 million ($780 million) attributed to hurricanes Gustav and Ike.
But with the world’s 10 largest insurers losing more than a quarter of their market value since the start of September, things are looking up for core business activities as reinsurance rates firm. Dr Arnoldussen says more insurers are relying on reinsurance as a direct capital substitute.
“The signals are quite clear that the market is firming,” he said. “Capital reserves have reduced and the market is less competitive. For primary insurers, solvency ratios are going down and equity markets have dried up.
“We have seen that at renewal there has been an upward trend for reinsurance rates both for Australia and the worldwide reinsurance market.”
While Munich Re’s combined ratio statistic of 100.2% for the first nine months was hardly outstanding, the company expects higher demand to align that closer to the targeted 98% in coming months.
“We are keeping our asset and credit risks low and playing it very safe,” he told insuranceNEWS.com.au. “In view of the increased cost of capital, the growing demand and the changed risk environment, we expect significantly higher prices, with percentage increases definitely going into the double-digit range.
“Where Munich Re is unable to obtain the requisite price, we will not write the business.”
A sign of the reinsurer’s apparent good health is the fact it is eyeing further acquisitions, particularly for its general insurance business. Munich Re has identified central and eastern Europe and Asia as key investment targets.
“We’ve kept our powder dry, and will look at opportunities in various markets, such as AIG for example, as it sells parts of its operation,” he said.
Dr Arnoldussen joins other foreign observers in noting the relatively good health of our local industry.
“The Australian markets for banking and insurance are in a comparatively strong position. APRA regulation is paying off and the managements of insurers have been steering these companies successfully.”
But he also believes Australia is inextricably linked to the international economy as a relatively small participant.
“One can’t isolate one country from the worldwide financial situation, and local insurers will be preparing themselves for further hits down the road,” he said. “This financial crisis is far from over.”
Ludger Arnoldussen, Munich Re Group Board Member with responsibility for Germany, Asia-Pacific and Africa, spoke with insuranceNEWS.com.au today during a visit to Sydney.
He says more local insurers could ramp up their reinsurance programs to mitigate risk as insurers face severe weather claims in addition to declining investment results.
In February, Suncorp reduced its exposure to natural catastrophes in the wake of rising claims associated with severe weather, with a $15.2 million retention buydown program.
The reinsurance against first-half hail, storm and bushfire events reduced Suncorp’s maximum event retention to $100 million, dropping to $50 million for further loss.
While other Australian insurers haven’t rushed to follow suit, it’s a strategy that is likely to be on the table during coming renewals.
“I wouldn’t be surprised,” Dr Arnoldussen said. “In the Australian market we are not seeing that yet, but should they encounter solvency issues then certainly that is likely to be the case. There is more need for reinsurance right now with an increased focus on security and avoiding unnecessary risk.
“In Australia during the last few months you have had an increased number of natural catastrophe claims and man-made losses.”
It’s a topsy-turvy time for reinsurers such as Munich Re. While the financial crisis has spurred demand for reinsurance and led to rates firming across the globe, they have like any other company been at the mercy of the financial elements.
Munich Re’s own results tell the story. Though the company recorded a record profit last year, it has had to withstand a €352 million ($699 million) burden from man-made losses in the first half of this year, against just €71 million ($141 million) in the corresponding period last year.
Third-quarter profit was just €12 million ($24 million), against €1.2 billion ($2.4 billion) last year. And the nine-month operating profit has declined 39% to €2.4 billion ($4.8 billion), while investment profit slumped 48% to €3.9 billion ($7.8 billion).
“There has been a decline in equities for the first nine months on the investment side, and you cannot evade that,” Dr Arnoldussen said. “Since the beginning of the year we have however reduced the potential impact.”
Munich Re abandoned its full-year earnings forecast of €2 billion ($4 billion), blaming ongoing volatility. It has also reduced its exposure to equities from around 10% of earnings to less than 5%.
The giant German reinsurer rated third-quarter reinsurance results “satisfactory” despite major losses, including €390 million ($780 million) attributed to hurricanes Gustav and Ike.
But with the world’s 10 largest insurers losing more than a quarter of their market value since the start of September, things are looking up for core business activities as reinsurance rates firm. Dr Arnoldussen says more insurers are relying on reinsurance as a direct capital substitute.
“The signals are quite clear that the market is firming,” he said. “Capital reserves have reduced and the market is less competitive. For primary insurers, solvency ratios are going down and equity markets have dried up.
“We have seen that at renewal there has been an upward trend for reinsurance rates both for Australia and the worldwide reinsurance market.”
While Munich Re’s combined ratio statistic of 100.2% for the first nine months was hardly outstanding, the company expects higher demand to align that closer to the targeted 98% in coming months.
“We are keeping our asset and credit risks low and playing it very safe,” he told insuranceNEWS.com.au. “In view of the increased cost of capital, the growing demand and the changed risk environment, we expect significantly higher prices, with percentage increases definitely going into the double-digit range.
“Where Munich Re is unable to obtain the requisite price, we will not write the business.”
A sign of the reinsurer’s apparent good health is the fact it is eyeing further acquisitions, particularly for its general insurance business. Munich Re has identified central and eastern Europe and Asia as key investment targets.
“We’ve kept our powder dry, and will look at opportunities in various markets, such as AIG for example, as it sells parts of its operation,” he said.
Dr Arnoldussen joins other foreign observers in noting the relatively good health of our local industry.
“The Australian markets for banking and insurance are in a comparatively strong position. APRA regulation is paying off and the managements of insurers have been steering these companies successfully.”
But he also believes Australia is inextricably linked to the international economy as a relatively small participant.
“One can’t isolate one country from the worldwide financial situation, and local insurers will be preparing themselves for further hits down the road,” he said. “This financial crisis is far from over.”