Baden-Baden: ‘Cyclical trough’ needed to trigger reinsurance upturn

The global reinsurance market does not yet show signs of turning despite the confluence of unprecedented natural catastrophes in 2011, low interest rates, the continuing financial crisis and dwindling reserve surpluses.

Speaking at Guy Carpenter’s annual reinsurance symposium in Baden-Baden, KBW insurance analyst Chris Hitchings said that to trigger a cyclical upturn, there first needed to be a cyclical downturn, characterised by three to five years of competition-fuelled pricing decline, followed by what he described as a cyclical trough. This is where all understanding of claims experience disappears, holes start to open in reserves, and companies are forced to cut business to preserve capital.

Despite complaints from reinsurers that prices need to rise after several years of gradual softening, Hitchings contended that none of the tell-tale signs of a market fall are present in today’s global reinsurance market.

“The fixation on this question of when the reinsurance cyclical upturn will arrive seems somewhat premature,” Hitchings said. “We do not appear to have had a cyclical downturn yet.”

Hitchings contended that the price falls reinsurers bemoan have not happened. “US catastrophe rates are unchanged from post hurricanes Katrina, Rita and Wilma [in 2005], and they are 30% ahead of where we were in 2004,” Hitchings said. “Non-US catastrophe rates have fallen, but are now back above 2004 levels.” He conceded, however, that casualty reinsurance prices had fallen 20%.

He also contends that there is little sign of “dumb capacity” in the reinsurance industry - companies that are willing to accept business that is greatly underpriced or with too-loose terms and conditions.

While he acknowledged that there was less fat in reserves, Hitchings pointed out that the industry’s claims provisions are not yet in a critical state. “The recent years, 2009 and 2010, are being reserved less cautiously than those from 2004 to 2008, but certainly not as incautiously as the terrible years of 1999, 2000 and 2001.”

One of the signs of trouble, says Hitchings, is shareholder disenchantment with the industry because of high losses. Though it appears the industry has fallen out of favour with investors - almost all listed (re)insurers’ stock is trading below book value - Hitchings contends that the losses are not there to spook them. “They are valuing companies at a discount because they have made losses that have not been reported yet. That may be true of the primary market, but we don’t think it is true of reinsurance.”

However, PartnerRe chief executive Costas Miranthis disagreed with Hitchings about reinsurance pricing. “Over the past three to four years, it feels we have been on a downward slope. Certainly on a risk-adjusted basis, prices have been reducing,” he said, adding that this is in areas where there have not been large losses.

Miranthis said recent catastrophes, coupled with falling interest rates and dwindling reserve margins, mean the profitability of the current accident year is “challenged”.