CEIOPS issued its financial stability report for the second half of 2010 and said Europe continued to see a fall in reinsurance rates in excess of those seen in the Asian markets.

Looking at Reinsurance CEIOPS said: “2010 showed, up to now, to be a difficult business year for the reinsurance industry after suffering the highest level of insured losses in a decade in the first half of 2010. The costliest events already occurred in the first three months, including the earthquake in Chile, Windstorm “Xynthia” in Europe and several severe catastrophe events in the US and Australia striking the reinsurers’ catastrophe budgets long before the onset of the hurricane season.

“Since the renewal in January 2010 the reduction of the rates has accelerated, despite the heavy losses sustained, with the renewals for US catastrophe business reportedly down by 12% on average.

“In Asia and Europe the downward trend was less striking; the decline appeared to be 5% and 2.5%, respectively, moving rates towards the levels seen in 2008.”

The Report added that while there is a growth of insurance penetration outside Europe and the US, there still is a low level of insurance in those regions. As a result the overall estimated economic losses resulting from natural catastrophes in 2010 exceed the insured losses several times.

The trend it warned was for little hope of profitable organic growth due to uneconomic rates and an investment environment “that provides an alternative between record low yielding and high-risk assets”.

It added therefore that merger or acquisition looked likely to be the preferred growth method in the current market given the fact that reinsurers remained well capitalised.

“Taking over a company seems an interesting alternative to entering new geographies and segments with no outlook of being profitable in a hard reinsurance market,” it added.

“In recent years the number of reinsurers located in other parts of the world, that are moving to Europe to establish their business has risen,” added the report. “Regulatory changes in Europe related to the Solvency II Directive and taxation-related issues in the US tax legislation have increased the attractiveness of a number of European countries, especially Ireland, Switzerland, the Netherlands and Luxemburg.

“The significant shift toward Europe results in accounting for about 60% of the global net reinsurance premiums. So far five of the six largest and longest standing global

reinsurers are based in Europe.”

CEIOPS said Munich Re, Swiss Re, Hannover Re, Lloyd’s and SCOR are still

dominating the global reinsurance market and the Reinsurance Directive has made it easier to move reinsurance business portfolios within the European Union.

The directive will also benefit those who are intending to put portfolios into run-off with CEIOPS predicting there may well be increased activity in the run-off sector in the coming years, as companies might seek to unlock capital in preparation for Solvency II requirements.

 

For the year ahead CEIOPS said the recapitalisation of the reinsurance market coupled with expectations of positive results would see further pressure on rates.

“There is still abundant capacity, but demand is suppressed, so pressure

on rates remained high and continued to drive down prices,” it added. “On

the other hand, global reinsurance rates fell by 6% on average through the 2010 renewal season. One major reason for this decline is the excess capital.

“The excess capital was also used to absorb the heavy losses experienced in the first quarter of 2010.”

Looking to the prospects for 2011 the report added: “At the end of the second quarter [2010] the US National Oceanic and Atmosphere Administration has predicted an active hurricane season for the Atlantic based on warm ocean temperatures like in 2005. But the predicted heavy hurricane losses failed to appear. Therefore, for example, Munich Re raised its profits forecast substantially after benefiting from the mild hurricane season and better returns of its investments.

“The rising profits will probably have a negative impact on the rates expected for 2011. Reinsurers will be able to maintain or even increase capacity. For Europe, a stable capacity with rates that could decrease by 5% to 10% is expected.

“The US will probably even experience higher capacity by 10% on average,

while the rates are likely to go down by 5% to 15% and in exceptional cases by 20%.”

Like many in the market CEIOPS said it believed it would need a major loss to prompt a hardening of rates and said in its view this would constitute “one market changing event in the region of a $50bn loss or multiple losses in the $20bn to $30bn range”.

The report said:  “This would decrease capacity, significantly harden the rates and therefore stabilise the market. So far the low catastrophe loss activity since the first two quarters kept it well below the stressed level to trigger a hard market.”

CEIOPS concluded: “In 2011, the still existing excess of capital will likely continue to depress rates, as reinsurance capacity will exceed demand. The weak pricing combined with the upcoming regulatory changes provides a difficult environment for reinsurers in the near future.

 “As the profit margins are eroding there remains further pressure from the low interest rates to achieve rate adequacy. Reinsurers are focused on high quality investments with short durations that are highly liquid.”

It warned the financial outlook for the European economies was still unsure.

Market volatilities look to have peaked again leading to newly increased concerns about public debt and the macro-economic outlook.

“All in all there still is uncertainty on the future developments, specifically with regard to the development of interest rates and asset prices,” it warned. “Portfolios of insurance undertakings and occupational pension funds seem in general diversified. On the other hand, regarding financial market conditions, some positive signals have emerged, e.g. since recently the number of insurers on negative rating watch has decreased. Insurance sector.”