Insurers’ profits are set to remain under pressure after the latest round of contract renewals failed to secure the price increases that many were hoping for.
Storms, earthquakes and wildfires last year caused an estimated $136bn of insured losses, the third highest figure on record. Many insurers expected that this would lead to much higher prices for January 1 reinsurance contracts.
But the latest figures from Willis Re, a reinsurance broker, show that prices on the worst hit lines of business rose by 7.5 per cent at most. Some reinsurers had been expecting double-digit increases.
James Vickers, chairman of Willis Re International, said the rises were lower because the losses were spread over a large number of events. Another factor, he said, is that the insurance industry is very well capitalised. “Going into these renewals the capital supply has been strong, and that has held back prices.”
The news for the reinsurers is not all bad though. In some specific areas, such as parts of the Caribbean, prices rose by 40 per cent.
Overall, the disasters has put an end to five years of falling prices, which have contributed to falling returns across the industry. The reinsurers have been able to push small price increases through, even in those areas that were not directly affected.
One of the main reasons for the plentiful supply of capital to back reinsurance contracts has been the popularity of insurance-linked securities, which allow pension funds and other investors to directly back insurance business.
According to Willis Re, $75bn of this “alternative” capital is available, up from $24bn in 2011.
“It has proved itself to be a good diversifying asset class for serious long-term investors such as pension funds,” said Mr Vickers.
“The nature of the losses is precisely what the insurance-linked security market had expected. North Atlantic hurricanes are the most modelled losses of all time.”
Mr Vickers said that, while some customers in the Caribbean received insurance payouts very quickly after the autumn hurricanes, it will still take some time before the exact cost of the damage is known. “Normally on catastrophe losses, it takes a couple of years for the market to digest the claims. Business interruption [claims] are notoriously complicated to assess.”
Insurance companies, meanwhile, are bracing themselves for more large claims in the future.
In a recent interview with the Financial Times, Christian Mumenthaler, chief executive of Swiss Re, said: “The average expected insurance losses will continue to grow, over the next 10 years . . . The main reason for that is that you have concentration of values in places that have these natural catastrophes.”
The pace of development in areas such as California, Florida and China means that losses are now higher when disasters hit, he said.
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