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Reinsurance Rates to Fall in January on Overcapacity

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Dec. 30 (Bloomberg) -- Global prices for reinsurance coverage will decline 7.5 percent for policies being renewed on Jan. 1 amid high levels of capital available in the industry, the reinsurance brokerage of Marsh & McLennan Cos. said.

“The level of reinsurance capital is about 11 percent in excess of historical levels,” David Flandro, head of global business intelligence at Guy Carpenter & Co., said in an interview. “There is immense pressure on reinsurers to return capital to shareholders.”

Reinsurers such as Munich Re and Swiss Reinsurance Co. sell coverage to providers of primary cover such as Allianz SE and Axa SA to help protect them against the cost of major claims. About two-thirds of property and casualty reinsurance contracts are typically up for renewal in January. Rates dropped 6 percent in the year-ago renewals after an 8 percent increase in January 2009 when capital was drained by costly storms, including Hurricanes Ike and Gustav, and the financial crisis.

“Subdued losses, combined with unrealized investment gains, led to record levels of capital,” which drove the decline in reinsurance pricing, as measured by the Guy Carpenter Global Property Catastrophe Rate on Line Index, the New York-based broker said.

Potential Consolidation

The decline in rates may stop in the event of a major disaster with about $50 billion in insured losses, whereas a $150 billion event would be needed for a “sustained turning of the market,” Flandro said. Low valuations of reinsurers that could spur consolidation as well as an increase in stock buybacks may help turn the market, he added.

The 26 members of the Bloomberg Property-Casualty Reinsurance Index currently trade at 1.05 times book value on average, compared with 1.19 times at the end of 2007, according to Bloomberg data. Munich Re, the world’s biggest reinsurer, currently trades at 0.87 times book value, compared to 0.95 at the end of 2007.

In the marine reinsurance market, the effect of the April explosion of the Deepwater Horizon rig that caused the leak of crude oil into the Gulf of Mexico drove prices for energy coverage up 15 percent to 35 percent, Guy Carpenter said in a report published on its website. The increases “were not as great as had been predicted,” the broker said.

Hurricane Ike

In global aviation and aerospace, primary insurance rates will continue to drop in 2011 because of “capacity in excess of 200 percent,” Guy Carpenter said. “This will lead to more pressure on the reinsurance market to offer reductions.”

Hannover Re, the world’s third-biggest reinsurer, said earlier this month that rates may decline in 2011 as this year’s claims weren’t severe enough. The June-through-November 2010 U.S. hurricane season didn’t result in major damages. In 2008, Hurricane Ike hit the U.S. coast and cost insurers $18.5 billion, according to estimates by Munich Re, making it the second-most expensive natural disaster for the industry after Hurricane Katrina, which cost insurers $62 billion in 2005.

Aon Benfield, the reinsurance brokerage of Aon Corp., said in a separate report today that “following a U.S. hurricane season with no land-falling events, reinsurers lowered rates at a slower pace than last January.”

Rates for U.S. catastrophe reinsurance coverage that includes hurricane protection fell by 5 percent to 10 percent, reflecting primary insurers’ price decreases, according to Aon Benfield. The outlook for renewals in April, June and July next year “is for softening at a pace similar to what we observed during the January 2011 renewals,” the broker said.

The reinsurance industry provided “ample” protection for the Chile quake in February that cost insurers $8.5 billion, making it the year’s most expensive disaster for the industry, Aon Benfield Analytics Chief Executive Officer Stephen Mildenhall said in a statement on Dec. 16. Reinsurers’ capital is at a record level, and supply of the funds to backstop insurers may outstrip demand, lowering rates next year, he said.

To contact the reporter on this story: Oliver Suess in Munich at osuess@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net; Edward Evans at eevans3@bloomberg.net

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