Property insurance may be softening in those regions outside of the US and Caribbean, but this is no reason for reinsurers to follow suit. Maintaining discipline is key in this environment, explains Heike Trilovszky.
Following the catastrophic hurricane losses in 2004 and 2005, which peaked for Katrina, the global insurance and reinsurance market for property cover has divided in two. On the one hand, there are the markets with traditional hurricane exposure. On the other hand, there are those that have been spared losses from extreme catastrophe events in the last few years. The first group is understandably experiencing a hardening in both original and reinsurance rates to an extent that was previously inconceivable. But the second group has been left with the difficult task of proving underwriting discipline in the truest sense of the word.
While in most parts of the world outside the US and the Caribbean the insurance industry has not experienced any catastrophe losses that are even remotely as high, there is no doubt that the corresponding exposures exist and that the risks are increasing. This is not just because of ever-increasing insured values, but also climate change, which is leading to increases in the number and the intensity of extreme weather events. Yet another record summer across Europe in 2006 may not have been an issue for the insurance industry but is another indication that weather patterns are changing.
Another indication was Hurricane Vince in October 2005. Normally, hurricanes originate off the coast of Africa and are carried westwards to the Caribbean by the trade winds. Hurricane Vince formed over the mid-Atlantic and then - fortunately having weakened to a tropical depression - swept south-eastwards across the southern tip of Spain. In Seville, 43 litres of rain per square metre fell within just a few hours. Meteorologists believe that Vince is the first hurricane ever to have formed so close to Europe.
And the insurance industry is feeling the financial impact of the higher activity of weather-related events. 2005 and the first half of 2006 have generated losses for severe flooding in Central and Eastern Europe and in Asia, and for the rising number of typhoons in the Pacific.
In the late 1990s, and following the events of 9/11, all insurance managers agreed that there was no serious alternative to risk-adequate prices and terms and conditions, and that the original insurance business itself had to earn the necessary cost of capital. Cross-subsidisation of overall results with the help of investment returns (cash-flow underwriting) was to come to an end. The correctness of this approach was firmly underlined by the bear market on the international stock exchanges after the "new economy" bubble burst.
Back to old tricks
The vehemence with which the new credo was proclaimed gave the sense that insurers really meant it this time. The majority of insurers are well aware of the great challenges the industry faces, and are committed to strict underwriting discipline. However, especially in primary insurance, old patterns are beginning to emerge. Some players have been systematically attempting to gain market share at the cost of profitability since the equity markets picked up again two years ago. In some European property insurance markets, price reductions of up to 20% in the commercial and industrial property business are not uncommon. Added to this, with the exception of cat-prone business, markets in Africa and Asia/Australasia continue to be very competitive.
When primary insurance markets soften, one tempting solution has been to pass the deteriorations in original terms and conditions onto reinsurers. So in a softening insurance market, reinsurers need to decide if they are prepared to follow suit and support this trend or if they should stick to protecting their bottom line, even if it may be at the expense of their top line.
The experience at Munich Re has been that a well-diversified portfolio, the capability to differentiate between good and bad risks, and the discipline to give profitability the precedence over volume, should lead to a good return on risk capital and provide customers with financial security on a sustainable basis. The world has become riskier and global capital markets invest where they see the best risk/return profiles.
That is why at the 1 January renewals Munich Re is only offering its capacity where terms and conditions are sufficient and where necessary, will withdraw from unprofitable business. Those clients looking for long-term relationships appreciate that long-term profitability is a prerequisite for reinsurers to provide long-term capacity.
- Heike Trilovszky is head of corporate underwriting at Munich Re.