Munich Re says subprime crisis may aid reinsurer prices

Reinsurance companies may benefit indirectly from the downturn in capital markets that has hit investment income in the sector because it may prevent them from lowering prices for the risk cover they provide to insurers, Munich Re said on Sunday.

Muenchener Rueckversicherungs-Gesellschaft AG (Munich Re) is a Germany-based provider of financial services, active in over 50 locations worldwide. The company's core businesses are reinsurance, primary insurance and asset management. It is based in Munich.

The world's biggest reinsurer said the drop in investment income this year due to fallout from the subprime crisis has caused profit shortfalls and dented equity capital in the insurance industry.

"This will have a positive impact on the cycle and accelerate a turnaround in the trend," Munich Re board member Torsten Jeworrek told a press briefing.

While some industry players and credit-rating agencies are predicting further declines in reinsurance prices, Mr Jeworrek pointed to "increasing uncertainty" about companies' negotiating behaviour in coming contract talks as a hopeful sign.

"If the capital markets move sideways or if we see major losses from hurricanes this year, that will accelerate the trend" towards a hardening of market conditions, he said.

Munich Re promised it would not indulge in price-cutting and would only accept risks if prices and conditions were right.

"Munich Re will maintain its underwriting discipline in every phase of the cycle," said Mr Jeworrek.

But analysts have warned the constraint from subprime-related writedowns would probably be limited and that reinsurance prices were still likely to fall four to five per cent in the coming negotiations with insurers, only slightly less than the six to seven per cent expected without the financial market impact.

Munich Re said there were plenty of reasons to think that the downward trend in prices might be reversed. Profits at the top five reinsurers fell nearly 40 per cent in the first half of the year - Munich Re itself dumped its full-year profit target after its investments took a hit - while the capital base of the global reinsurance industry looks set to shrink for the first time in five years.

And global claims costs from business interruption, natural disasters and personal injuries are soaring, underscoring the need to obtain appropriate prices for underwriting insurance risks, the company said.