Munich Re sees 24 month hard market, lowers proportional exposure: GS

Executives at Munich Re explained that they have been seeing a continued hardening of reinsurance rates and that they believe this could last another 24 months, but are adjusting their exposures to suit the market environment, according to analysts from Goldman Sachs.

Munich Re hosted meetings with analysts last week and the Goldman Sachs analysts came away feeling the global reinsurance company has an opportunity in the hard market to grow its natural catastrophe book.

Because of improved reinsurance market conditions, Munich Re has a stronger appetite for catastrophe risks, the analysts reported, and the firm believes it has the ability to write that business profitably, even considering climate change.

The analysts said, “We see this as a sweet spot for companies who can manage risk well, and we believe Munich Re is such a company that has strong underwriting capabilities and risk control to take advantage of the hardening market.”

However, the Goldman Sachs analyst team point out that the investors they deal with have been questioning the prudence of writing catastrophe risks under the uncertainty of climate change.

“Investors have questioned whether reinsurance companies should decrease nat cat exposure given increasing climate risk, with weak underwriting results disappointing in the last five years,” the Goldman Sachs team wrote.

But Munich Re’s management said that as climate change will gradually affect its business and portfolios over time the reinsurance firm has time to continually react to this, adjusting its models and responding to the evolution in climate risk.

But, Munich Re has taken some actions to harden its portfolios against rising risks anyway, reducing some types of business, the analysts report.

Munich Re has reduced its exposure to some proportional covers, so quota shares and the like, which it sees as a way to limit the risk of higher catastrophe frequency impacting its results.

In addition, Munich Re is expected to keep adjusting its catastrophe appetite to suit the market environment, increasing it when rates are harder, but reducing it when prices decline.

On the forward-looking view of rates, the analysts said that Munich Re believes this hard market could last for another 24 months.

It sees the current market as “a sweet spot for companies who can manage risk,” the analysts said, by which they mean those who can clearly understand and adapt to the underlying exposure changes and inflation impacts.