Amid the optimistic headlines coming from the Reinsurance Rendez-Vous lie some rather more pessimistic viewpoints
Monte Carlo has not been short of reinsurers talking up their prospects, as well as the prospect of price increases. However, a range of contradictory statements are emerging which could spell static or negative pricing into 2010 and some cause for concern beyond that.
The list of rather more negative messages, mainly from rating agencies, analysts and brokers include:
- Prior year reserve releases seen in 2008 and 2009, which artificially improve results, will not be made to the same levels if at all in 2010, so balance sheets will not look so strong.
- Inflationary pressures, potentially arriving within the next 12 months if interest rates are increased in the US and Europe.
- Largely static reinsurance pricing, kept down by hard-pressed insurance clients and cash strapped consumers.
- Increased cost of regulatory capital/solvency requirements or collateral.
- Relatively benign catastrophe season (so far).
Brokers led the argument that said pricing would remain flat going into the new year reinsurance renewals. Many pointed to longer term economic difficulties coming to bear in 2010.
Mike O’Halleran, chairman of Aon Benfield, pointed to economic concerns which could impact pricing.
“I’m concerned with projections for 2010 and where adjustable payrolls are going. Construction values and other indicators are also down,” O’Halleran said.
“We have not really seen the impact in ’09 yet and I think it’s going to have a material impact on our customers.”
O’Halleran added: “You can see in the numbers throughout the quarters that the premiums and the margins are down and that’s got to mean something to the market and it’s got to go down.”
Bryan Joseph of the insurance team at PricewaterhouseCoopers said reinsurers had to ask themselves whether they can really dictate price rises.
“When you consider that around 55 to 60% of business is quota share behind the biggest writers in the business, then there’s very little ability to push pricing up very high because their clients are suffering as a result,” Joseph said.
“Apart from individual lines such as Gulf of Mexico marine/energy and aviation, I would expect neutral pricing to small falls as a general trend at 1 January renewals.”
Greg Carter, managing director of insurance (EMEA & Asia) at Fitch, confirmed that the number of favourable reserve releases seen in the US is unlikely to be repeated in the near future.
“As such, the combined ratios of insurers and reinsurers serving the US market will go upwards towards the European levels of combined ratio.”
Fitch said combined ratios in the US were on average 10 points lower at about 86 than their European counterparts at 96.
Carter added that capital might be harder to come by for companies which had been inconsistent with major loss estimates. “If a refinancing event were to occur, the ones who would have the most difficulty raising capital are those who underestimated the losses last time,” he said.