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Reinsurers, Brokers Clash on Outlook for Prices in Monte Carlo

Munich Re and Scor SE said overall reinsurance prices will increase, driven by more expensive catastrophe coverage, while brokers said claims haven’t risen enough to push prices higher.

“We are of the firm opinion that prices for catastrophe capacity will be more expensive in the near future,” said Munich Re’s Chief Executive Officer Torsten Jeworrek during a presentation in Monte Carlo yesterday. “I can promise you we will not see price decreases in our portfolio.”

Reinsurers’ earnings have been stressed by natural catastrophes, including the earthquake and tsunami that struck Japan in March, causing record insured losses of $70 billion in the first half of the year, according to Guy Carpenter & Co., the reinsurance brokerage of Marsh & McLennan Cos. At the same time, low interest rates are crimping investment returns, which typically provide a buffer for earnings when claims rise. Yields on benchmark 10-year German government bonds fell to a record low of 1.77 percent on Sept. 9.

“The pricing environment has been improving for both insurance and reinsurance.,” Victor Peignet, CEO of Scor’s global property and casualty unit said at a press conference in Monte Carlo yesterday. “If the primary market is driving in that direction there is no reason why reinsurance should not follow.” The reinsurer, France’s largest, aims to have annual sales of 10 billion euros ($14 billion) in 2013.

The companies and their customers, insurers such as Axa SA, began meeting in the principality on Sept. 10 to start negotiations for 2012 contracts. They’ll convene again in the German town of Baden-Baden in October to continue talks. Insurers buy reinsurance to cushion the effect of costly disasters.

Brokers’ View

Munich Re and Swiss Re, the two largest reinsurers, typically renew about two-thirds of their annual property and casualty contracts in January, and the remainder in April and July. The renewals on April 1 focus on the Asia-Pacific region. Both reinsurers have said that rates will have to climb as a result of this year’s disaster bill.

Brokers, which are in Monte Carlo to help their clients negotiate better prices, say they don’t expect a marked increase as the losses this year have been too isolated and not big enough to drive prices up next year.

A European natural catastrophe would contribute more to a change in price trends than the Japan earthquake, because most reinsurance coverage is for U.S. hurricanes and earthquakes, and European windstorm losses, said Bryon Erhart, chief strategy officer of Aon Benfield, the world’s biggest reinsurance broker.

‘Hard Bargains’

“Given the uncertainty in the marketplace, signals of increase is something that you would expect from one side of the market,” as reinsurers say capital has diminished, Guy Carpenter’s Chief Executive Officer Alex Moczarski said in an interview yesterday. “We do drive hard bargains and rates have gone down.”

Reinsurance rates declined in four of the last five years, according to the Guy Carpenter World Property Catastrophe Rate on Line Index, which tracks prices on a worldwide basis. During that period, the industry escaped natural disasters on the scale of Hurricane Katrina, which flooded New Orleans and caused $62.2 billion of insured losses in 2005.

In 2008, writedowns on equity investments and losses related to the financial crisis hurt earnings at reinsurers worldwide. The firms were able to use to use those losses as an argument to increase prices in the January 2009 renewals. Rates declined again in the following two years, mostly because of an absence of major natural catastrophes.

Market to ‘Drift’

“In absence of significant loss events we except the global market to drift, without substantial decreases for the 2012 renewal,” said Chris Klein, head of sales operations for the U.K. and Europe, Middle East and Africa regions and market relationships at Guy Carpenter, during a presentation in Monte Carlo on Sept. 10. The broker expects prices in Europe to be flat or slightly down next year.

Fitch Ratings said yesterday that reinsurers’ earnings prospects remain “uncertain” because of the economic slowdown, adding they could gradually recover next year if catastrophe losses normalize, which would mean losses of between $30 billion and $35 billion. Companies’ ability to raise prices into 2012 will depend on the catastrophe losses during the remainder of this year, including from Hurricane Irene, which made landfall Aug. 27 as a Category 1 hurricane in North Carolina before striking New York the next day as a tropical storm.

“We don’t expect to see a massive rate increase,” Chris Waterman, head of EMEA insurance ratings at Fitch Ratings, said during a presentation.

‘Pockets of Growth’

Irene may result in insured damages of $2.6 billion, less than initial estimates, according to Kinetic Analysis Corp., a firm that predicts the effects of disasters. The Atlantic hurricane season runs from June through the end of November. Munich Re said on Sept. 9 it expects claims from Irene in the “low three-digit million euro range.”

Damages from the events in Japan, an earthquake in New Zealand, floods in Australia and other catastrophes led to a first-half loss of 211 million euros ($298 million) at Munich Re, and a 70 percent plunge in net income to $295 million at Zurich-based Swiss Re.

“We are not saturated in reinsurance,” said Victor Peignet. “We still have enough pockets of growth in our core business.”

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