The FINANCIAL — According to Dow Jones, Germany's Munich Re AG (MUV2.XE), the world's second-largest reinsurer by premium income, Sunday said recent declines in profits and equity capital among its primary-insurance customers should work in favor of the rates the reinsurance industry can demand for contracts up for renewal.
It also said it expects the current market environment to speed up a turnaround in reinsurance rates. Rates have been flat or lower in many business areas in recent years, in part because primary insurers' strong balance sheets enabled them to assume a greater share of the costs, rather than to pay for reinsurance.
According to Dow jones, reinsurers provide a backstop for insurers as they shoulder the industry's riskiest policies on their balance sheets. Reinsurers and primary insurers are gathering in Monte Carlo this week to discuss the market environment for reinsurance contracts, which are renewed once a year.
Munich Re argues that primary insurers such as Allianz SE (AZ) and American International Group Inc. (AIG), hampered by the global financial crisis, have less capital available to pay for high losses caused by hurricanes and other disasters, which will increase their demand for financial support from reinsurers. It also argues that cheap refinancing alternatives using equity are difficult in the current capital markets environment, while claims costs triggered by storms and floods, such as for business interruption, continue to be high.
Reinsurers, which include Swiss Re Co. (RUKN.VX), Hannover Re AG (HNR1.XE) and Scor SE (SCR.FR), also took some hits in the financial crisis, which has limited the capital the industry can set aside for claims costs. This should be positive for rates, Munich Re argues, pointing to the 39% decline in consolidated six-month profits of the world's five largest reinsurers together and that "in 2008, the capital base of the global reinsurance industry is expected to shrink again for the first time after five years of growth."
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