Given last year's low level of costly catastrophe events, 2013 turned out to be highly profitable for most insurers. But evidence is mounting that premium rates on catastrophe-related business lines are under growing pressure - meaning potentially tougher times ahead for Europe's three big reinsurers, Swiss Re (SREN), Munich Re (MUV2) and Hannover Re (HNRX).
True, hefty reserve releases amidst a benign claims environment did help the trio to report strong underwriting profits in 2013. Swiss Re's reinsurance combined ratio (of claims to premiums), for instance, reached a highly profitable 83.3 per cent, while Munich Re's and Hannover Re's came in at a solid 92.1 per cent and 94.9 per cent, respectively. So far, premium rate pressure at the big three has bucked the market trend, too. Rates on renewal in January, for instance, fell 1.5 per cent at Munich Re - that's likely to have "positively surprised the market", reckon analysts at Berenberg. Swiss Re's renewal rates fell 3.6 per cent, which still compares well with the 10-25 per cent fall in US property catastrophe rates highlighted by insurance broker Willis Re.
But that price resilience isn't likely to last. The problem is that extra capital has been pouring into the casualty reinsurance market from less traditional sources, such as from the catastrophe bond market, and that's driving "more competition in terms of coverage, structure and pricing”, explains Andrew Newman, Global Head of Casualty at Willis Re. Crucially, given the big reinsurers’ focus on catastrophe reinsurance, they’re relatively more exposed to these pressures than most underwriters.
Accordingly, none of the big reinsurers sound especially bullish. At forthcoming renewals in April and July, Munich Re expects pricing pressure to be "very appreciable", for example, while Hannover Re warns that 2014 will remain "challenging". In fact, analyst Michael Huttner of JP Morgan Cazenove thinks such reinsurance pricing weakness "shifts profit toward the primary insurers and away from reinsurers", leaving them as "relatively less attractive investments".
