After two years of high prices, reinsurers are likely to see some price declines for the protection they offer to insurers but the collapse in prices seen in past cycles is unlikely, credit rating agency Standard & Poor's (S&P) said on October 23.
Insurers are looking for price reductions of 5-10 percent across the board in Europe, and whether reinsurance companies give up more than that will be a critical test of their underwriting discipline as the two sides hammer out risk cover contracts for 2008, S&P reinsurance specialist Peter Grant said in an interview.
"Prices are declining but we expect there to be sufficient margin in the prices, even at the lower level, to allow reinsurers to earn an adequate return on their capital," Grant told Reuters on the margins of an annual meeting of industry negotiators.
Reinsurance companies like Swiss Re and Munich Re, which make money by helping to shoulder insurance companies' damage claims, raised prices in the aftermath of the devastating hurricanes that struck the United States in 2005.
But with almost no damage claims in 2006 and moderate losses so far in 2007, insurers are balking at paying big yet again. Past insurance cycles have seen reinsurance companies follow big price rises with big declines in a battle for market share.
Reinsurers have promised not to do it again this time around and Grant said he is cautiously optimistic they will deliver.
Companies have become better at managing their capital and have upgraded their methods for pricing risks and managing portfolios, Grant said.
"But what is not clear is whether they have the discipline to deploy these sophisticated tools when it matters," he said. Observers will get some indication of how successful reinsurers have been when they report the results of the current renewals round early next year, but it may take another 12-18 months to be certain, Grant said.
In the meantime, reinsurers' aim of disciplined underwriting may be bolstered by the increasing sophistication of investors, who used to punish them not only for declining net profit, but for declining premiums as well.
"Investors are now more willing to tolerate a shrinking top line as long as reinsurers show a robust bottom line," Grant said.