* Prices fell by up to 25 percent in some areas
* Moody's industry outlook cut in part on weak price power
* Alternative capital use "robust" in Q2 -broker
By Jonathan Gould
FRANKFURT, July 1 Reinsurance prices fell by as
much as 25 percent in key markets mid-year as pension funds
poured in money and demand for cover from insurance companies
remained subdued, brokers said on Tuesday.
Reinsurers have been negotiating with insurance company
clients in the United States, Australia and Latin America to set
the terms and prices for shouldering big risks like hurricane
and earthquake damage in contracts that take effect from July 1.
The reinsurance industry, whose biggest players are Munich
Re, Swiss Re and Hannover Re,
has been unable to halt a decline in its pricing power, dubbed a
"soft" market in industry parlance.
"The tentacles of the softening market are spreading far and
wide, with no immediate signs of relief," said John Cavanagh,
chief executive of broker Willis Re.
Willis said property catastrophe reinsurance prices fell by
as much as 25 percent in hurricane-prone Florida and were down
by a fifth nationwide in the United States.
The industry's weak pricing power was one reason credit
rating agency Moody's changed its outlook on the reinsurance
sector to negative from stable last month.
The global slump in interest rates since the financial
crisis has made it hard for reinsurers to earn a good return
from investments. It has also tempted pension funds,
institutional investors and high net-worth individuals to invest
in capital market products that compete with traditional
reinsurance, such as catastrophe bonds.
Total catastrophe bond issuance in the first half of 2014
exceeded that seen in the first half of 2013 by 50 percent, said
Bryon Ehrhart, CEO of Aon Benfield Americas.
Catastrophe bonds are used by the insurance industry to
transfer extreme risks, such as those from earthquakes or
hurricanes, to capital markets investors. Investors receive a
high yield on the bonds they buy in return for agreeing to cover
damages they consider unlikely.
"The use of alternative capital during both the first and
second quarters has been robust, with twelve catastrophe bonds
completed during the second quarter of 2014," Ehrhart said.
Moody's said another 15-20 percent drop in catastrophe
insurance prices next year would push them below 2001 levels,
making it difficult for some reinsurers to earn their cost of
Highlighting the challenges, Berkshire Hathaway
chairman and chief executive Warren Buffett said earlier this
year his firm had eliminated most of its catastrophe insurance
business in the United States.
Other big reinsurance players have been working to avoid
being caught in a stampede towards lower prices, saying they are
maintaining a focus on profit and are willing to drop business
that carries too low a price for the risk involved.
JP Morgan analyst Michael Huttner has forecast a 5 percent
decline in reinsurance prices charged by Munich Re, Swiss Re,
Hannover Re and French reinsurer Scor at July's
Traditional reinsurers have been trying to exert more
influence in the market, XL Group Chief Executive Mike
"We've been able to maintain our book," he said of his
company's own performance in the July reinsurance contract
renewals. "It's certainly a fist-fight but we're feeling pretty
good about how we'll come out."
(Reporting by Jonathan Gould; Editing by Catherine Evans)