An intensely competitive environment currently prevails across property/casualty reinsurance markets worldwide. The supply of reinsurance capacity continues to far exceed demand. A major driving factor here is the very healthy capitalisation of most insurers due to the absence of large losses in regions with a high risk potential. Ceding companies have responded by passing on fewer risks to reinsurers. The pressure on prices, especially in US natural catastrophe business, has been further exacerbated by the inflow of capital from alternative sources – i.e. the ILS market, which for its part is experiencing substantial cash inflows from pension and hedge funds.
As a further factor, the protracted low level of interest rates is putting a strain on reinsurers, with pricing discipline taking on particular significance in the face of diminished investment returns. These general conditions are in turn likely – provided the current year is once again spared market-changing major loss events – to shape the treaty renewals as at 1 January 2015. On the one hand, competitive pressure will therefore probably remain high. On the other hand, reinsurance prices should – leaving aside a few exceptions – stabilise relative to the business renewed for the 2014 underwriting year because scope for further rate reductions is limited in light of the return on equity required by reinsurers.
With its profit-oriented underwriting policy Hannover Re considers itself well-placed to handle the challenges posed by the soft market conditions. “What is vital in this climate is to keep a disciplined eye on ensuring that treaty conditions remain commensurate with the risks”, Chief Executive Officer Ulrich Wallin emphasised during a press conference in Monte Carlo. “Our cedants can rely on high-quality coverage concepts for appropriate prices. In areas where adequate prices cannot be obtained, we are prepared to relinquish business going forward, as we have in the past.”
Despite the soft market conditions in property/casualty reinsurance, Hannover Re sees growing demand for high-quality reinsurance protection in view of rising concentrations of values in urban population centres and the implementation of risk-based solvency schemes. Special mention may be made here of growth markets in Asia and Latin America as well as business with agricultural risks.
For its three pillars of property/casualty reinsurance – target markets, specialty lines and global reinsurance – Hannover Re anticipates the following developments in the treaty renewals as at 1 January 2015:
I. Target markets:
The North American primary insurance market continues to enjoy an upswing. Yet the absence of sizeable natural disasters and other major losses is leaving a mark on the reinsurance side, with the result that pressure can now be felt on rates in property and to a more muted extent casualty business. In the case of non-proportional reinsurance programmes with a favourable loss experience spanning several years, Hannover Re expects prices to trend lower. Conditions in proportional reinsurance should remain adequate.
Based on its highly diversified portfolio and its broad range of products and services, Hannover Re is in a position to offer its clients tailored reinsurance solutions. With this in mind, the company expects to be able to profitably expand its client relationships despite the entry of new capital into the market.
We group together under Continental Europe the markets of Northern, Eastern and Central Europe. The largest single market is Germany.
Germany: Market conditions in Germany are not as soft as in other countries owing to the considerable strains incurred from natural perils in 2013 and increases in losses, some of which only become apparent in the current year.
Bearing in mind that the total scale of the 2013 losses was not yet known at the time of the treaty renewals on 1 January 2014 and with primary insurers finding themselves compelled to take remediation measures, loss-impacted lines are expected to see at least stable prices and conditions in the upcoming renewals. The same is true of motor own damage insurance, which has also failed to turn a profit for a number of years now – a situation further aggravated by last year’s severe hail events “Andreas” and “Manni”. Not only that, localised summer thunderstorms have already caused further losses in 2014, especially in some western parts of Germany.
Industrial fire insurance in Germany, which has been impacted by numerous smaller and mid-sized losses, continues to give cause for concern.
In view of the heavy loss expenditure incurred in the German market, the rate level is expected to remain stable as at 1 January 2015.
Central and Eastern Europe: Political tensions, repercussions of the financial and economic crisis as well as fierce competition among insurers do not change the fact that demand for high-quality reinsurance solutions has risen. Particularly in the markets of Central andEastern Europe, Hannover Re anticipates strong growth in premium volume over the medium term – with reinsurance prices set to remain largely adequate.
II. Specialty lines:
The 2014 financial year is already feeling the strain of several significant major losses in the airline segment. Although substantial insurance capacities continue to be available in aviation business, it is to be expected that these events will at least lead to stabilisation of the rate level for conventional aviation (re)insurance. On the other hand, the recent loss experience in the area of war covers is likely to prompt appreciable premium increases. Thanks to its long-standing expertise in all lines of aviation reinsurance, this environment also offers attractive business opportunities in Hannover Re’s assessment.
Early softening tendencies can be observed in marine reinsurance after several years of a hard market. Despite this, the deterioration in the reserves for removal and salvaging of the “Costa Concordia” and “Rena” wrecks should prevent any substantial decline in prices. As far as the reinsurance of offshore risks is concerned, even though sums insured are rising in the original market Hannover Re expects to see modest softening owing to the absence of major losses.
Credit and surety
Loss ratios in credit insurance and in business with political risks remained stable on a good level compared to previous years. The burden of losses in surety insurance has decreased to a normal level after two years of elevated claims activity. All in all, it is to be expected that prices will hold steady or may come under merely moderate pressure.
III. Global reinsurance:
Cat XL business
The oversupply of reinsurance capacity continues to be a feature of natural catastrophe markets. The absence of major losses has further ensured – especially in the United States – that prices have seen another notable drop. Certain segments and regions are now expected to see rates bottom out because in some cases the obtainable margins no longer adequately reflect the risks.
Hannover Re anticipates the following developments on individual markets:
North America: Prices have fallen very sharply in the United States, with Florida seeing particularly marked price erosion. As a result, it is becoming increasingly difficult to secure adequate margins. Even allowing for the fact that rates in North America are crucially driven by how costly the hurricane season proves to be, they are unlikely to sink any lower in view of risk considerations. What is called for here is underwriting discipline on the part of all market players.
Europe: The numerous losses caused by natural disasters in Europe – in both 2013 and 2014 – should at least have a stabilising effect on prices and conditions.
Japan: Despite rate reductions in the renewals as at 1 April 2014, the rate level in Japan can be described as adequate overall. Given the losses caused by the snowstorm of February 2014, further rate decreases are unlikely.
Australia/New Zealand: Owing to the uncertainty associated with the further run-off of losses from the 2011 New Zealand earthquake, rates can at least be expected to hold broadly stable. For the Australian market, too, prices are likely to remain unchanged on the whole. Hannover Re is well represented on both markets, both as a traditional reinsurer and in the context of its activities in the ILS market.
Worldwide treaty business
Developments in worldwide treaty business vary across markets and regions:
Asia-Pacific: Here, too, markets are fiercely competitive, as reflected in broadly declining rates. In view of the soft market conditions Hannover Re concentrates on its good long-term client relationships and complements its portfolio with profitable niche business.
Latin America: Growth here remains strong, despite modest rate declines on account of the existing oversupply in the markets of Central and South America. In many Latin American countries, however, increased demand for security and know-how can be observed, and financially robust reinsurers are therefore able to write business at adequate prices. Hannover Re considers Latin America to be one of its growth markets.
Agricultural risks: The rising demand for agricultural commodities and foodstuffs as well as the increase in extreme weather events are fuelling demand for agricultural covers, especially in emerging and developing economies. Yet recent natural disasters in Europe should also serve to boost interest in protection against potential crop failures. Overall, the growing implementation of public-private partnerships as well as an ever-expanding range of products are increasingly opening up opportunities to generate profitable business with agricultural insurance.
Insurance-Linked Securities: Hannover Re operates in multiples roles on the ILS market – firstly for protection against its own catastrophe risks and secondly in order to transfer its clients’ insurance risks to the capital market. This primarily takes the form of collateralised reinsurance arrangements and is supplemented by the issue of catastrophe bonds. In view of the advantageous constellation for investors as well as for reinsurers and insurers alike, Hannover Re expects to see steadily growing demand over the coming years. In addition, the company is itself active as an investor in catastrophe bonds, thereby ensuring that it can leverage every opportunity offered by the ILS market.
Structured reinsurance/Advanced Solutions: With the adoption of risk-based models for calculating solvency requirements not only within but also outside the European Union, Hannover Re expects to expand this business. Demand for innovative and tailor-made reinsurance solutions is continuing to grow, supported by changes in purchasing behaviour on the part of many clients.
Given an absence of large loss events, Hannover Re again anticipates intense competition for the treaty renewals as at 1 January 2015 with sustained pressure on prices and conditions. Nevertheless, it is the company’s expectation that cedants will increasingly look to high-quality reinsurers. “Even in a soft market environment we can expect stable, attractive business opportunities on the basis of our excellent ratings”, Mr. Wallin noted. “Reliability, expertise and established business relations are of crucial importance to ceding companies, especially in times such as these.”
Hannover Re will continue to adhere to its systematic cycle management combined with strict underwriting discipline and, in accordance with its underwriting strategy, remains committed to its broadly diversified portfolio of high-quality existing business supplemented by niche and specialty acceptances written as and when opportunities present themselves. Risk assessment and selection in the context of underwriting decisions is assisted by sophisticated mathematical methods and exposure-based underwriting tools.
Furthermore, Hannover Re secures its capital base – especially in a soft market – by itself making use of reinsurance. By purchasing additional retrocession protection the company reduces the volatility of the business and thereby conserves its robust capital resources.
In addition to safeguarding stable income from its reinsurance portfolio, Hannover Re attaches critical importance to preserving the value of its assets under own management. In so doing, the company is committed to a balanced risk/return profile and a low-risk mix of investments.
Based on constant exchange rates the Hannover Re Group expects to generate stable to slightly higher gross premium volume for the current 2014 financial year.
Assuming that major loss expenditure does not significantly exceed the expected level of EUR 670 million and that there are no adverse movements on capital markets, the company continues to anticipate Group net income in the order of EUR 850 million for 2014.