One cannot really discuss or make plans around the future of reinsurance in South Africa without reference to the global outlook.
I’m writing this report from the Monte Carlo Rendezvous attending the annual meetings between insurers, intermediaries and reinsurers. From the first day of these meetings, the differences in opinion on what the reinsurance industry needs to do are so diverse. Reinsurers, as expected, are talking of increases in rates for catastrophe reinsurance. The insurers and their reinsurance brokers however seem to differ from this view and they have their own valid reasons.
Right at the beginning of this Monte Carlo gathering, a headline in a Monte Carlo edition of the Intelligent Insurer reads: “Rates must reflect the increasing risks; reinsurers need to be paid for the growing exposures that they are assuming,” said Tad Montross, CEO of Gen Re. He went on to say that the high number natural catastrophes experienced around the world this year should force a reassessment of pricing. This is a tough stance by one of the leading reinsurers in the world and also comes after a year of poor investment returns, a scenario unlikely to change in 2012.
Another large reinsurer, Munich Re, talks of the same theme although a bit more subtly. Tortest Jeworrek, CEO at Munich Re, says, among other hints of rate increases, that they will only “accept risks at commensurate price , terms of conditions, particularly after the major losses of the kind experienced in the first quarter of 2011”.
Reinsurance brokers, on the other hand (and representing their cedent clients), do not see the need to adjust rates above a “warranted” risk adjusted level for the territories that have experienced losses. The bigger brokers in Monte Carlo, Aon Benfield, Guy Carpenter and Will Re, feel the rates should stay at the same levels as in 2011, if not even reduce!
A look back might assist understanding of the two diverging views from the two different category players in the market; Late in 2010 and in 2011, the insurance industry has witnessed the following catastrophe loss events; Chile earthquake (US$ 8 billion), Australian storms, New Zealand earthquakes (US$5 billion in Darfield and US$10 billion in Lyttleton), Japan earthquake (US35 billion) and more recently Hurricane Irene ($6 billion). Already the economic losses in 2011 are approaching US$400 billion, compared to an annual average of USD $90 billion from 2004 to 2010. Reinsurers have carried, or will carry, the bulk of these losses and it is no wonder they are asking for some increase in prices. It is worth noting that reinsurance recoveries from first half events have already exhausted excess of loss premium in the market even before the US tornadoes and Hurricane Irene are taken into account.
For reinsurers, investment returns have also been poor due to the subdued equity markets and low interest rates. Reinsurers believe this alone also calls for rate increases.
However, when one looks at the debate from a different angle, it is also apparent that whilst the earnings for reinsurers will be hugely effected in 2011, capital and capacity remains abundant and for this reason brokers feel that any increases in rates must be modest and on risk-adjusted basis. Evidence indicates that, despite the losses in the first half of the year, the July and October renewals have shown modest increases. This is because capital and capacity remains in supply despite these catastrophic events.
According to Aon Benfield, reinsurer capital at the end of 2011 is more likely to end at higher level than the USD$470 billion at the start of the year. Aon Benfield predicts that reinsurers will again have capacity in excess of demand from insurers in every region. Supply and demand will therefore come to play and whilst the new catastrophe model changes and the 2011 loss activity may shift the balance of supply and demand going forward, the intermediaries feel that supply will meet these needs causing no further impact to pricing in peak loss-free catastrophe regions.
Lloyds and rating agency, Standard and Poor’s, tend to agree with the brokers simply because there is excess capital and capacity available in the market and market forces will prevent significant rate increases.
Unfortunately, South Africa will be affected by how the global players react to the 2011 events, albeit at a reduced scale compared to the regions which have experienced the large losses. Like in 2010, South Africa has largely had a profitable year, with hardly any catastrophe losses. Indications are that the insurance and reinsurance markets will have another profitable year in 2011.
Locally, there has been a growing concern that insurance companies are not buying sufficient catastrophe cover. It is therefore expected that insurers will have to buy higher levels of catastrophe cover and this is before taking into consideration the effects of the world events in 2011. There was already some pressure on rates which hitherto have been considered low in addition to the feeling that South African insurers’ net retentions are low compared to other regions.
One can therefore argue that South Africa was due for some rate reviews anyway and the world events will only strengthen this view.
In South Africa’s favour is the interest from overseas markets that see it as a potential growth area, but have been reluctant to take large lines due the perceived low rates and lack of commercially available catastrophe risk modeling.
Increase in rates therefore looks inevitable, but the question is by how much. When all is taken into account, Aon Benfield expects South Africa’s cost of catastrophe reinsurance in 2012 to increase by between 5% to 7,5% on risk adjusted basis and this includes the effect of the global losses in 2011. This is less than what the rest of the global reinsurance market would like to see. Time will tell.