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Rates poised to rise as industry seeks to boost profitability

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Rates globally for insurance covers are set to harden further in the coming months as reinsurers look to adjust prices upwards to shore up earnings, Munich Re has predicted.

Already under pressure for several years from low interest rates – a situation that has marred income from low-risk investment assets – the pandemic has accelerated the pressure on the industry, the reinsurance giant says.

“Interest rates have dropped to record lows once again [this year],” Munich Re said. “Against the backdrop of the coronavirus crisis, it is increasingly likely that the current interest-rate environment will continue to affect low-risk investments for the foreseeable future.

“These circumstances mean that sustained profits, in long-tail business and elsewhere, will only be possible if prices match the assumed risks.”

Munich Re says the gradual erosion of rates and the softening of terms and conditions – caused by excess capacities and randomly lower major-loss expenditure, particularly in European countries – have for years been making profitability a challenge for reinsurers.

As interest rates are expected to stay low for quite some time, “income for insurers must come from risk assumption itself, and that includes long-tail business,” Doris Hopke, Member of the Board of Management responsible for Europe and America, said

“Relying on interest income, or hoping that statistically likely losses will not occur, is an unsuitable basis for the long-term assumption of major risks.”

Munich Re says it will consistently ensure that prices, terms, and conditions are commensurate with the risks in the next renewal round.

The reinsurer says COVID-19 has elevated risk awareness of systemic developments that could arise from a single crisis.

“The sheer scale of the COVID-19 pandemic serves as a stark reminder that we must always properly assess and manage low-probability risks that bear tremendous loss potential,” Munich Re says.

“Recent experiences following the lockdown of public life and the business world in many countries have been a wake-up call regarding the staggering potential for systemic risks to result in losses that subsequently trigger many different repercussions.

“Yet it is by definition impossible to insure risks that lead to losses everywhere at the same time, thus violating the fundamental criterion of insurability.”

An immediate fallout from COVID-19 has been the effect on cyber threats, which has increased as businesses have shifted to remote working arrangements since mid-March when the pandemic broke out.

Cyber attacks have increased and Munich Re sees this as one of its most important strategic growth areas.

The reinsurer is pursuing a comprehensive strategy of assessing existing risks individually, identifying systemic trends and pursuing risk-commensurate prices, terms, and conditions.

It predicts the global cyber insurance market, currently valued at slightly above $US7 billion ($9.9 billion) this year, could increase to $US20 billion ($28.4 billion) in 2025.