Munich, Frankfurt When the big reinsurers gather for the traditional meeting with their customers in Baden-Baden starting at the weekend, everything may seem the same at first glance. Just like before the pandemic, more than 2,600 participants in the triangle between the Kurhaus, congress center and Brenners Parkhotel will negotiate the conditions for insuring against major losses.
But there is one crucial difference from previous years: Because the accumulation of claims has led parts of the industry into the red, prices are rising.
However, this only provides partial relief for reinsurers. “The entire development leads to falling profitability for insurers, even if they can pass on some of the costs to their customers,” says Matthew Mosher, head of the rating agency AM Best.
Industry giants Munich Re, Swiss Re and Hannover Re are working flat out on pricing with their major customers. Rarely in recent years has there been such a multitude of challenges, all of which can lead to considerable financial damage. In addition to natural catastrophes, protection against a cyber attack is at the top.
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According to a customer survey, the British specialist insurer Hiscox, which introduced cyber protection in Germany back in 2011, now rates the threat of hacker attacks as the number one risk for companies – even before an economic downturn, the pandemic or the shortage of skilled workers.
Working from home, digital networking and thus the vulnerability of companies have increased significantly, and critical security gaps that affect many companies at the same time are becoming more frequent, observes Managing Director Markus Niederreiner.
This has dramatic consequences for insurers. The hoped-for success story with cyber insurance, which was supposed to bring in new income for the industry, especially in business with commercial customers, has turned into a loss-making business.
The number of commercial and private customers who took out cyber insurance last year rose by around a quarter to 243,000. Because at the same time the number of cyber damages increased to 3700 and thus by 56 percent, the industry had to cope with significant losses for the first time. According to the industry association GDV, one euro of income was offset by 1.24 euros of expenditure.
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According to its own statements, things are going better at Munich Re, which is the market leader for cyber insurance in Germany with a share of around 20 percent and has a share of 14 percent worldwide. Emphasis of the Munich are companies or private households. The so-called limits, which specify the maximum insured risk, tend to be kept small.
“So far we’ve done well with that,” says Munich Re board member Thomas Blunck. The claims-cost ratio, which signals a profit for the insurer if the value is less than 100 percent, is less than 90 percent for the people of Munich in Europe and 85 percent worldwide.
The reinsurer is the market leader for cyber insurance.
(Photo: Munich RE)
However, the market for cyber insurance is currently changing rapidly. According to Munich Re, premium income in Europe has increased from around EUR 400 million to EUR 2 billion over the past five years. Due to increased damage, the industry is currently shutting down offers and coverage. The consequences are sometimes price increases of up to 300 percent, as brokers report.
At the same time, deductibles were increased and the limits for individual risks reduced. Whereas before that the risk limits were generally around ten million euros, today they are more like five million euros. Some individual losses, which recently reached dimensions in the high single-digit million range, are no longer completely covered in this way.
It is also becoming more and more common for so-called main causes of damage to be excluded in the conditions. This includes, above all, damage caused by ransomware attacks, i.e. the extortion of ransom money through illegal intrusion into systems. It goes without saying that customers are not happy about fewer services with significantly increasing premiums. But because the trend is the same across the industry, they are missing
alternatives. Especially as the risk continues to increase in type and scope. Just a few days ago, attacks against the publishing house Heilbronner Voice and the baby food manufacturer Hipp became known. Negotiations about future cyber protection are likely to be a major topic in Baden-Baden.
However, this only outlines a small part of the challenges that reinsurers are currently facing. The high losses from natural catastrophes, which the industry has been dealing with for years, recently reached another sad peak with Hurricane “Ian” in the US state of Florida.
After the estimates initially differed widely, the experts at Swiss Re are now assuming total insured losses of between 50 and 65 billion dollars. The damage for the Swiss reinsurer is said to be around 1.3 billion dollars. The hurricane has had an impact on earnings for the group. In the third quarter, Swiss Re now expects a loss of half a billion dollars. For the year as a whole, Berenberg analyst Kathryn Fear now only expects annual profits of $947 million, after $1.4 billion in the previous year.
At Hannover Re, too, stockbrokers reacted with uncertainty when the group’s management was not yet able to precisely quantify the financial effects of “Ian” at the Investors’ Day. CEO Jean-Jacques Henchoz tried to calm things down and argued that the Hanoverians’ market share in Florida was lower than in the rest of the USA. However, the share price came under pressure. According to CEO Blunck, Munich Re is still working on the damage calculations for “Ian” and is assuming a profit margin in the third quarter in line with previous expectations.
Expensive natural disasters
It is already foreseeable that insurance against natural catastrophes will become significantly more expensive. The rating agency Fitch expects a more difficult renewal round for many contracts on January 1 than in previous years. The reasons are varied.
On the one hand, the effects of climate change are becoming increasingly evident. In addition to Hurricane “Ian” in Florida, there have already been numerous extreme weather events in Europe this year – from winter storms and hailstorms to forest fires. On the other hand, it is already becoming apparent that in particularly endangered areas such as coastal regions, insurance could become unaffordable. Munich Re board member Torsten Jeworrek recently commented on this in an interview with the Handelsblatt.
“The demand for risk protection is increasing significantly in all regions in the current uncertain times. At the same time, there are reinsurers who are reducing their capacities in some areas,” says Frank Reichelt, who is responsible for business in Northern, Central and Eastern Europe at Swiss Re, describing the difficult situation. For natural catastrophe risks in Germany alone, he expects primary insurers to buy between two and two and a half billion euros more reinsurance cover for 2023.
This is also due to the massive increase in inflation leading to higher insured values. This is noticeable in all lines of business, but it is particularly evident in motor vehicle and home insurance. In Baden-Baden, Swiss Re will therefore also have to talk to its customers about higher deductibles, which Reichelt says have not yet reflected claims inflation.
Damages in the millions from war
The Russian war of aggression in Ukraine and its consequences are another challenge for the insurance industry. Globally disrupted supply chains mean that repairs take longer and the damage becomes even more expensive.
Top managers such as Munich Re boss Joachim Wenning repeatedly insist that war itself is generally not insurable. Nevertheless, the world’s largest reinsurer reported losses of 200 million euros in the first half of the year in indirect connection with the Ukraine war. It shouldn’t stay that way. Wenning had already indicated in April in the Handelsblatt interview that he considered the likelihood of legal disputes to be relatively high. Due to the unresolved situation in many places, for example leasing contracts for aircraft decommissioned in Russia, further quarters are likely to follow before more precise figures on possible damage are available.
By contrast, the burdens on reinsurers in connection with the Covid-19 pandemic have declined. Munich Re, Swiss Re and Hannover Re had already spoken of significantly lower burdens in the summer than in the previous year. But this positive trend will not change the fact that the negotiations in the Black Forest spa will not be easy for reinsurers: “Baden-Baden is the beginning of a discussion that is only just beginning,” expects Claudia Hasse, Head of Germany at Munich Re.
More: Hurricane Ian is likely to be expensive for European reinsurers