German reinsurers eye Florida
FRANKFURT, May 30 (Reuters) – German reinsurers Munich Re and Hannover Re said they are well prepared for an active hurricane season and would keep a close eye on Florida’s insurance market in the event of a big storm.
The Atlantic hurricane season kicks off officially on Sunday, and forecasters are predicting it will be more active than normal, with between six and nine hurricanes, of which two to five may be major. For more see.
“We are now in a 20-30 year warm phase, and so we have to reckon with more and stronger hurricanes,” Munich Re board member Torsten Jeworrek told Reuters.
“That means more than in 2006 and 2007, but a lot less than in 2005,” he said on the sidelines of an insurance conference.
Reinsurance prices for storm cover have been falling after relatively calm hurricane seasons over the last two years.
Credit rating agency Fitch this week said it would take a major storm causing insured losses of at least $40 billion to reverse the current downward pricing pressure.
But both Munich Re, the world’s No. 2 reinsurer after Swiss Re, and Hannover Re, the fourth-biggest, said that despite declining prices this year, they were focused on profitability in their business, which helps insurers shoulder the burden of storm risks.
“The business is still profitable, despite these declines,” said Hannover Re board member Juergen Graeber, explaining that the falling cost of passing on reinsurance risks to other reinsurers, known as retrocession, was helping maintain margins.
“We have significant retrocession capacity in place, both for frequency and severity of storms,” Graeber said.
Munich Re has increased the amount of retrocession relative to the last two years, taking advantage of the lower prices, but Jeworrek said the company was also willing to reduce the amount of risk cover it offered to insurers if prices were too low.
“Either we get the prices that are necessary given expectations in this warm phase, or we don’t get them, in which case we won’t make the capacity available,” Jeworrek said, adding that it was too early to forecast the results of reinsurance contract renewal talks set for July 1.
FLORIDA FUND POLITICAL FOOTBALL
Reinsurers will also closely watch how the State of Florida’s $36 billion hurricane catastrophe fund will react if the state is hit by big storms this year.
The fund has had a mixed impact on reinsurers so far, trimming business for some, particularly specialised Bermuda-based companies, while bolstering demand elsewhere.
Graeber said the facility was underfunded and only charging about one-third of what it should charge.
“The fund has too little cash to finance a medium-sized Florida catastrophe without approaching capital markets,” Graeber said, adding that this would be a Category 3 hurricane causing $15-20 billion in damage.
Munich Re’s Jeworrek said insurance could become an issue in the U.S. presidential elections if problems arose in refinancing the fund after a big hurricane strike in Florida.
“There would be a lot of political pressure on where the money would come from; tax increases, presumably.”
The hurricane season typically peaks between late August and mid-October. The U.S. general election is in early November. The U.S. Gulf Coast, Mexico, Caribbean and Central American countries were battered during 2005. A record four major hurricanes hit the United States, including Katrina, which devastated New Orleans, killing around 1,500 people on the U.S. Gulf Coast and causing $80 billion in damage. Florida was struck by four powerful hurricanes in the 2004 season.