Reinsurance: prices rise, but not as desired – economy

In February 2021, a severe onset of winter in the United States brought about arctic temperatures – even in states like Texas, which actually never experience freezing temperatures. Destroyed buildings and business disruptions caused insured losses of $ 15 billion. Storm Bernd, which caused severe flooding in North Rhine-Westphalia and Rhineland-Palatinate in July, is also not cheap for insurers with around seven billion euros. And Hurricane Ida, which recently hit the United States, will cost the industry up to $ 35 billion, not including damage from record flooding in New York City. Insurers will be called upon to pay correctly in 2021, and therefore also reinsurers, with which insurers insure themselves against major claims.

For Jean-Jacques Henchoz, boss of the third supplier Hannover Re, this can only mean one thing: he believes that further price increases are inevitable. “Only in this way can reinsurers offer reliable protection against risks in an increasingly difficult environment.” Even German insurers, which have so far been largely untouched by higher premium claims, should now dig deeper into their pockets, according to Hannover Re. Global market leader Munich Re and industry-second Swiss Re, have made similar statements these days.

Insured corona damage is expected to be around $ 37 billion

Reinsurers are currently negotiating contracts for the coming year with their clients. Industry generally meets in Monte Carlo on the French Riviera. Due to the corona pandemic, the so-called September Rendezvous, to which nearly 3,000 participants from 80 countries arrived in 2019, had to be canceled for the second year in a row. The virtual meetings should be enough to clarify the most important thing.

For many years reinsurers have had to contend with falling prices. One reason is the oversupply of reinsurance protection. In addition to traditional providers, investors from outside the industry, such as pension funds, are increasingly investing their money in the market through so-called insurance securitizations. The level of premiums has increased again for about three years, but the momentum has slowed down recently. Due to the high disaster losses, reinsurers are hoping for a new tailwind – especially since, in their opinion, providers have yet to ask insurers to pay enough for corona damage. “Covid-19 was only partially taken into account when renewing the contract in 2021 because a lot of things were not yet clear”, explains Silke Sehm, member of the board of directors of Hannover Re. The rating agency Moody’s now estimates insured corona damage at around $ 37 billion.

Nonetheless – Moody’s now sees the situation as more positive than at the start of the pandemic. Competitor Fitch is also more optimistic. “Strong price increases will be key to ensuring that profits rise until 2022,” said Moody’s expert Helena Kingsley-Tomkins. The reason: the demand for reinsurance protection is increasing because, firstly, the economy is recovering, and second, the most recent catastrophe losses mean that there is a need for coverage.

Cyber ​​insurance offers growth potential, but it is also risky

But there are also enough problems for reinsurers. Low interest rates always lead to lower investment income. The concern about inflation is new. Rising prices also mean higher expenses for insurance claims. In addition to normal inflation, social inflation, particularly evident in the US, is particularly painful. Changes in society increase the demands for damages as well as the sums awarded by the courts. Then, insurers and reinsurers must supplement their loss reserves with large sums, especially with long-term contracts such as civil liability. “Inflation is the enemy of insurers,” explains Thierry Léger, from the management of Swiss Re. Lawyers specializing in mass trials, vying for clients with effective publicity and supported by litigation financiers, have still fueled the trend.

Moreover, with cyberinsurance, reinsurers have sought problematic ground for their future growth. With policies, companies protect themselves against the financial consequences of hacker attacks. Munich Re, in particular, had increased its turnover in the still young segment in recent years. In 2020, it was over $ 850 million. “We expect this trend to continue and that we will surpass the billion dollar mark this year,” said Stefan Golling, member of the board of directors of Munich Re.

But the industry can also be extremely dangerous for insurers and reinsurers. A large-scale attack with blackmail software results in high costs for a large number of customers at the same time. There is no regional compensation, as is the case for natural disasters, which usually only strike locally. As a result, many insurers and reinsurers have become very cautious. But you can’t get away from it, Golling believes. “In order to stay relevant to customers, you have to stay in e-commerce.”

However, demand appears to be lower than reinsurers had hoped for. In a Moody’s survey of 43 reinsurance buyers, only eight said they currently want to buy more cyber reinsurance.

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