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MONACO (Reuters) - Munich Re (MUVGn.DE) expects reinsurance prices and conditions will be largely stable when it renews billions of euros worth of contracts with its insurance company clients at the start of 2013, though economic risks complicate the outlook.
The world's biggest reinsurer said in a statement on Sunday that there is "sufficient capacity" in the market for now, a view that chimes with industry observers who predict the supply of reinsurance will exceed demand in the coming months, capping reinsurers' room to raise prices.
Credit rating agency Moody's, for example, calculated that about $6 billion in new capital has entered the already adequately capitalized reinsurance sector since 2011.
"Excess capital tends to drive down revenues and margins," Moody's said.
The reinsurance industry saw one of its costliest years ever in 2011, when earthquakes ravaged Japan and New Zealand, storms blasted the United States and floods swamped Thai industrial parks, but the effect on reinsurance prices has faded.
Munich Re said its prediction of flat prices and conditions also applied to natural catastrophe reinsurance, barring major losses such as from hurricanes or earthquakes that could cause prices to suddenly spike higher.
Prices in casualty business were also expected to stabilize or increase only slightly, with profitability in the segment already being squeezed by the effects of low interest rates, which are being held down by global central banks in the hopes of spurring the economy.
"With negative real interest rates, this pressure will intensify, since claims payments that rise due to inflation can only be partly compensated for by investment gains," Munich Re said in a statement released for the annual meeting of the reinsurance industry being held in Monte Carlo.
"This must be factored into our pricing, particularly for long-term business," the company added.
Low interest rates on government bonds, the main destination for insurers' investments, coupled with financial market volatility from the euro zone sovereign debt crisis, have stifled investment income and forced insurers to concentrate on turning a profit from underwriting alone.
"More than ever, our industry faces the challenge of achieving stable earnings in its core business and further reducing its dependency on the investment result," said Munich Re board member Torsten Jeworrek in the statement.
Munich Re was carefully matching assets to liabilities and taking other operational steps to minimize the fallout from a range of economic risks, including the withdrawal of a country from the euro zone, a government insolvency, a surge in inflation and possible deflation.
"Munich Re regards the stabilization of the euro zone as one of today's most burning political tasks," Jeworrek said.
"We have to prepare ourselves at the same time for very different scenarios." (Reporting by Myles Neligan; additional reporting by Jonathan Gould in Frankfurt; editing by Jason Neely)