After a two-year Corona break, the reinsurers of the world are meeting again in Monte-Carlo on the Côte d'Azur. Whether Munich Re, Swiss Re, Lloyd's, Berkshire Re or China Re - everyone is represented. They negotiate with their customers in overpriced hotels decorated with lots of marble, plush and stucco: These are primary insurers such as Axa, R+V or Zurich, which in turn insure private individuals and businesses. The reinsurers protect the primary insurers against catastrophes and other major losses, they are the insurers of the insurers. Sometimes they also do business with large industrial groups.
The "Rendez-vous de Septembre" has been taking place in Monte-Carlo for 60 years. The place represents a dated notion of luxury, but is better known today for gambling and tax evasion. The organizer counts 2750 registrations from all over the world, almost as many as before the outbreak of the pandemic.
The reinsurers are actually satisfied. After years of dry spells, prices for reinsurance cover have been rising since 2017. The rating agency Fitch also expects higher prices for the coming year. In property insurance - buildings, factories, business interruption - there will be further price increases in 2023, said analyst Manuel Arrive.
This is also helped by the fact that some reinsurers are becoming more cautious when it comes to reinsurance against natural catastrophes in view of climate change. That narrows the supply. "We are entering a really tough market where the demand for property coverage cannot be fully met due to reduced capacity," he said. "Demand is rising sharply," said Catherine Thomas from the US rating agency AM Best. Reinsurers are also benefiting from the rise in interest rates, which are boosting their investment income again.
"Inflation will peak in 2022."
At the same time, however, very dark clouds are gathering. There is much to suggest that the negotiations in the Mediterranean climate will not only be harmonious. Main theme: The high inflation puts a strain on the industry because it has to spend more on damage. "Inflation will peak in 2022," expects Munich Re board member Torsten Jeworrek. But it will still play a major role in 2023. Prices for reinsurance coverage need to reflect that, he said. "If we don't achieve that, we will withdraw reinsurance capacity," Jeworrek threatened his clients in Monte Carlo. That would narrow the supply even further.
"Long-term high inflation is a real danger for reinsurers," believes analyst Arrive. It becomes dangerous if the inflation rate is more than two years above the average of the past ten years. Fitch is therefore keeping a close eye on reinsurers who have not built up enough reserves for claims and who do not have the market power to push through high price increases. They can be found above all in the liability area, where price discipline is not so high. In contrast to the property area, Fitch does not expect any increases for 2023, but rather stable prices - in view of the inflation, in reality a reduction. "There is a risk that some reinsurers will react too late," said Arrive.
Competitor Standard & Poor's (S&P) doubts that there will be much left of the price increases after deducting inflation. "One or the other plus could be eaten up," analyst Johannes Bender pointed out. At Munich Re, after the contract negotiations in July, the bottom line was a price increase of only 0.1 percent. S&P sees "more headwinds than tailwinds for the global reinsurance sector".
In addition, the Ukraine war is a burden for insurers and reinsurers. The conflict could cost the industry up to $15 billion, Fitch analyst Brian Schneider believes. Much is still unclear, such as how much the aircraft stranded in Russia will ultimately cost the companies. So far, reinsurers have only accounted for a fraction of this. "But by the end of the year they have to specify their Ukraine losses," said Schneider.
Munich Re does not see nuclear power plants as a green form of energy
The increase in natural catastrophe losses caused by climate change is also a major concern for reinsurers. The likelihood of severe floods like in Europe in 2021 or heat waves that hit Great Britain, among other things, is increasing sharply, said Munich Re board member Thomas Blunck.
Munich Re does not see nuclear power plants as a green form of energy, as the European Union does. But Jeworrek called nuclear power plants an "important transition energy." Munich Re is less lenient with coal-fired power plants. The reinsurer will not reinsure coal projects. So far there have been no inquiries about it. Last week, major insurance brokers complained that their customers were finding it difficult to obtain insurance coverage for additional coal-fired power generation.
The reinsurer intends to further expand its commitment to renewable energies. He already offers so-called performance guarantees for wind turbines and solar panels. This protects the operators against the systems delivering a lower output than expected. In the future, Munich Re will also offer this to hydrogen manufacturers if electrolysis systems produce less than calculated. "In 2021, $446 billion was invested in renewable energy worldwide," Blunck said. "If we want to achieve the climate goals, it has to be $1,300 billion a year by 2030," he calculated. Of course, this also means a gigantic market for insurers and reinsurers.