Hurricane Mayhem May Give Boost to Dampened Reinsurer Earnings

JOHANNESBURG (Capital Markets in Africa) – While this year’s hurricanes will cost reinsurers billions of dollars in claims, they may eventually bring some relief to the industry’s lackluster earnings.

In the German spa town of Baden-Baden, reinsurance executives are this week meeting up with brokers and clients to renegotiate contracts due for renewal in January. Many of them are arguing that the expected damages from hurricanes Harvey, Irma and Maria — as well as earthquakes that struck Mexico — will put an end to years of declining prices for their coverage. That, in turn, could have a positive effect on industry earnings in the medium term.

“For areas that have been directly affected by this year’s losses, there can only be price increases in the January renewals,” Frank Reichelt, head of Swiss Re’s German and Nordics business, said in an interview. “For other areas — especially those where prices have been significantly under pressure recently such as in northern Europe — there will be an impact too.”

This year could become one of the most costly for insurers and the reinsurers who help them shoulder risks, possibly exceeding the bill from hurricanes Katrina, Rita and Wilma in 2005. Those storms have resulted in total claims of 83 billion euros ($97 billion), according to data collected by Munich Re, the world’s biggest reinsurer. Swiss Re, the no. 2 company in the industry, said on Oct. 20 that it expects total industry losses of $95 billion. About $3.6 billion in claims will result from the series of natural disasters, according to Swiss Re.

“Don’t tell me these losses were non-events,” Joachim Wenning, chief executive officer of Munich Re, said during a podium discussion in the spa town on Sunday. “We are talking about a $100 billion industry event, maybe $110 billion or $120 billion.”

Munich Re said on Sept. 13 that it will probably report a loss for the third quarter because of Harvey and Irma. Hannover Re, the world’s third-biggest reinsurer, said on Sept. 21 that its major-loss budget of 825 million euros would probably be exceeded this year following the Atlantic hurricanes and the Mexico earthquakes.

In recent years, reinsurers have been faced with increased pressure on their earnings, both from ultra-low interest rates and years of declining prices following years of low claims and an oversupply of capital available for coverage. The rates they charge primary insurers to help them cover disaster risks have declined in eight of the past 10 years, according to the Guy Carpenter World Property Catastrophe Rate-On-Line Index.

“Katrina, Rita and Wilma back in 2005 didn’t have a significant impact on rates outside the U.S., but price levels today are different,” said James Nash, head of the international business at Guy Carpenter, the reinsurance unit of broker Marsh & McLennan Cos.

Source: Bloomberg Business News