By Jonathan Gould and Jason Rhodes
MONACO (Reuters) - Reinsurers are trying to stay confident about pricing prospects for 2011 in the face of a chorus of industry observers predicting price and earnings pain.
At their annual Mediterranean meeting, the world's biggest reinsurance players have once again vowed to maintain discipline in setting prices on the contracts for risk cover they provide to insurers, saying they won't engage in a competitive race to the bottom.
The world's biggest reinsurer, Munich Re
French reinsurer Scor
"We hope by January we can show renewals that are at least stable or slightly up," Scor Chief Executive Denis Kessler told a news conference on Sunday.
But brokers, credit rating agencies and other industry observers, attending the Monte Carlo meeting in force, say 2011 is shaping up to be the third year in a row that property and casualty premiums will fall.
Insurance companies, who pay reinsurers to take on their risks of big claims such as for hurricanes or earthquakes, are being flexible about how much reinsurance they are using, buying less of it when it costs more, said James Eck, senior credit officer at credit ratings agency Moody's.
"Insurers don't expect to pay more and there would be significant resistance to higher prices," said Eck, adding that most insurers surveyed by Moody's said they planned to buy the same amount or less reinsurance in 2011 than they did in 2010.
Supply is another issue. There is a lot of excess capital available to reinsurers to write business with insurance clients, following the recovery of capital markets since 2009.
"While excess capital is in the market there is no catalyst to increasing rates," said Greg Carter of credit ratings agency Fitch.
By some estimates, the industry is overcapitalized by around $13 billion but observers disagree on how significant that is.
"It's only overcapitalised if we don't have a major event," said Michael O'Halleran, executive chairman of the world's biggest insurance broker, Aon Benfield.
GAME-CHANGING CLAIM
But the size of that event would have to be big, said rival reinsurance broker Guy Carpenter.
"A loss in region of $20 to 30 billion, while not likely to lead to significant rate hardening, would decrease capacity and stabilize the market," said Chris Klein, Guy Carpenter's global head of reinsurance markets.
"A loss exceeding $50 billion, however, could lead to an immediate correction in pricing," Klein said.
That kind of loss could easily be generated by a hurricane but the Atlantic wind season has yet to unleash a storm producing major insurance losses, let alone anything as devastating as Hurricane Katrina in 2005.
Barring that, industry players expect topline prices to continue drifting downwards in 2011 and combine with persistently low yields on reinsurers' investments to drag down industry profit margins. Hence the need for underwriting discipline.
The somber outlook is one reason why reinsurers are trading at only around 85 percent of book value and will need to find good ways to burnish their attractiveness to investors.
Moody's calculated that reinsurers returned around $5 billion in capital to shareholders through share buybacks in the first half of 2010, with authorisations for another $6 billion still outstanding for the remainder of the year.
Guy Carpenter's chief executive for international operations, Henry Keeling, said reinsurers' penchant for buybacks now will hurt them in the long run.
"We see this as giving up a competitive advantage," he said.
(Additional reporting by Sarah Mortimer; Editing by Muralikumar Anantharaman)
