In February 2021, a violent onset of winter in the USA caused arctic temperatures – even in states like Texas, which actually never experience frost. Destroyed buildings and business interruptions resulted in insured losses of a whopping $ 15 billion. Storm too Bernd, which caused severe flooding in North Rhine-Westphalia and Rhineland-Palatinate in July, will not be cheap for insurers at around seven billion euros. And hurricane Ida, which recently raged in the USA, will cost the industry up to 35 billion dollars, not counting the damage caused by the record floods in New York. The insurers will be asked to pay properly in 2021, and thus also the reinsurers, with which insurers insure themselves against major losses.
For Jean-Jacques Henchoz, head of the third largest provider Hannover Re, this can only mean one thing: he believes that further price increases are inevitable. “Only in this way can reinsurers offer reliable risk protection in an increasingly challenging environment.” Even the German insurers, which have so far been largely spared from higher premium claims, would now have to dig deeper into their pockets, according to Hannover Re. World market leader Munich Re and Swiss Re, second in the industry, made similar statements these days.
The insured corona damage should be around 37 billion dollars
The reinsurers are currently negotiating with their customers about the contracts for the coming year. The industry usually meets in Monte Carlo on the Côte d’Azur. Because of the corona pandemic, the so-called Rendezvous de September, to which almost 3,000 participants from 80 countries arrived in 2019, had to be canceled for the second year in a row. Virtual meetings have to be enough to clarify the most important thing.
For many years reinsurers had to put up with falling prices. One reason is the oversupply of reinsurance protection. In addition to traditional providers, investors from outside the industry such as pension funds are increasingly investing their money in the market through so-called insurance securitisations. The premium level has been rising again for around three years, but the momentum has slowed recently. Because of the high catastrophe losses, the reinsurers are hoping for a new tailwind – especially since, in their view, the providers have not yet asked the insurers to pay enough for the corona damage. “Covid-19 was only partially priced in when the contract was renewed in 2021 because a lot was still unclear,” explains Hannover Re board member Silke Sehm. The rating agency Moody’s now estimates the insured corona damage at around 37 billion dollars.
Nevertheless – Moody’s now sees the situation as more positive than at the beginning of the pandemic. Competitor Fitch is also more optimistic. “Strong price increases will be instrumental in ensuring that earnings will rise into 2022,” says Moody’s expert Helena Kingsley-Tomkins. The reason: The demand for reinsurance protection is increasing because, firstly, the economy is recovering, and secondly, the most recent catastrophe claims mean there is a need for coverage.
Cyber insurance offers growth potential, but it is also risky
But there are also enough problems for reinsurers. The low interest rates are still causing declining investment income. The concern about inflation is new. Rising prices also mean higher expenses for insurance claims. In addition to normal inflation, social inflation, which is particularly evident in the USA, is particularly painful. Changes in society increase claims for damages as well as the sums awarded by the courts. Then insurers and reinsurers have to top up their loss reserves by large sums, especially with long-term contracts such as liability. “Inflation is the enemy of insurers,” explains Thierry Léger from Swiss Re’s top management. Lawyers specializing in mass lawsuits who vie for customers with effective advertising and are supported by litigation financiers further fueled the trend.
In addition, with cyber insurance, reinsurers have sought a problematic field for their further growth. With the policies, companies protect themselves against the financial consequences of hacker attacks. Munich Re, in particular, had increased its premium income in the still young segment in the past few years. In 2020 it came to more than $ 850 million. “We expect this trend to continue and that we will pass the one billion dollar mark this year,” says Munich Re board member Stefan Golling.
But the line of business can also be extremely dangerous for insurers and reinsurers. A large-scale attack with blackmail software leads to high costs for a large number of customers at the same time. There is no regional compensation, as is the case with natural disasters, which usually only strike locally. As a result, many insurers and reinsurers have now become very cautious. But you can’t keep your hands off it, Golling believes. “In order to remain relevant for customers, you have to stay in the cyber business.”
However, the demand seems to be lower than the reinsurers had hoped. In a survey by Moody’s of 43 reinsurance buyers, only eight stated that they currently want to buy more cyber reinsurance.