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Reinsurance conference in Monte Carlo

In advance of the industry gathering of insurers and reinsurers in Monte Carlo the rating agency A.M. Best has upgraded Hannover Re’s rating from “A” (Excellent) to “A+” (Superior). A.M. Best is thus recognising Hannover Re’s excellent capitalisation, its successful business model and its consistently good results in a challenging environment.

Following on from pleasing treaty renewals in the first half of 2012 Hannover Re is looking ahead with confidence to the treaty renewals as at 1 January 2013.

The positive outcome of the treaty renewals in the current year was driven by the heavy losses from natural disasters in 2011. These prompted significant price increases, above all for loss-impacted programmes. The adjustments made to natural catastrophe models also played a part in the increases, albeit to a varying extent. The treaty renewals were once again influenced by the low interest rate level and the associated difficulties in generating sufficient investment income. As a result, the considerable discipline exercised with respect to technical pricing was sustained.

“We were pleased with the outcome of our renewals in April and in June/July. Along with the favourable development in global property (catastrophe) lines, we are now seeing the first positive signs – including in the United States – of an improved climate overall in the casualty lines. We are confident that this trend will continue in the treaty renewals as at 1 January 2013”, Chief Executive Officer Ulrich Wallin affirmed during a press conference in Monte Carlo.

For the coming renewal rounds it is Hannover Re’s expectation that the risk adequacy of rates will be sustained. All in all, further price increases should be attainable. The company continues to see stable or rising demand for reinsurance protection driven by a growing concentration of values in urban conurbations as well as by the implementation of risk-based solvency systems (for example Solvency II in Europe). The positive factors that have already shaped previous treaty renewals, including the adjustments made to natural catastrophe models and the low interest rate level, will again have a favourable effect on treaty pricing as at 1 January 2013 and will prevent market softening. Another crucial factor in the price trend will be the question of whether 2012 still experiences any sizeable natural catastrophes such as those seen in the previous year or whether the major loss experience remains as moderate as it was in the first half-year.

For the three pillars of its non-life reinsurance – namely target markets, specialty lines and global reinsurance – Hannover Re expects the treaty renewals as at 1 January 2013 to bring the following developments:

I. Target markets:

  • North America

Overall, an upturn can be observed on the North American market.

Despite the absence of major hurricanes, property business has experienced sufficient losses from natural perils for rates in primary and reinsurance business to remain on a high level. For the coming year further rate increases should be possible, since the below-average profit expectations with reduced returns on equity continue to be unsatisfactory. The positive price trend is likely to be sustained, and should accelerate in the event of a substantial catastrophe loss.

On the casualty side the anticipated trend reversal towards a hardening market set in some quarters ago. The upswing varied widely in primary insurance business; first evident in workers’ compensation insurance, it could be observed of late in almost all areas of professional indemnity and casualty business as a whole. The rate increases are driven in particular by lower investment income and negative run-off results for more recent years.

  • Germany

Industrial property and casualty business is experiencing protracted fierce competition, even though the claims frequency – especially in fire insurance – necessitates a trend reversal. Retail business is also coming under increasing earnings pressure, since the large number of frost claims at the turn of the year have left homeowners’ insurance as a chronically unprofitable line.

In motor business – both own damage and liability – a significant recovery can be observed. Hannover Re therefore anticipates improved conditions and rising premiums in original business, which should also be to the benefit of reinsurers.

II. Specialty lines:

  • Aviation

With capacities increasingly flowing into the market, the business climate remains soft. Nevertheless, good opportunities are still anticipated for 2013; this is especially true of the BRIC countries and other emerging markets. The rate level is stable overall. Given the moderate major loss situation, a significant improvement in prices cannot be expected in the next twelve months. Hannover Re ranks among the market leaders in aviation reinsurance.

  • Marine

On both the property and casualty side Hannover Re expects conditions to continue improving in the offshore/energy line. The increases in premiums and deductibles pushed through in recent renewals will be sustained owing to the growth in values in original business. In the context of the “Costa Concordia” loss, the affected marine hull and liability reinsurance covers will see increases – sometimes markedly so – in premiums and deductibles.

  • Credit and surety

After exceptionally low claims activity over the past two to three years, loss ratios in credit and surety insurance are showing moderate increases owing to the muted economic growth around the world; overall, though, they remain on a good level which is on a par with that seen before the financial market crisis of 2008. The same is true of political risks business. Primary and reinsurance prices are expected to remain largely stable.

  • Structured reinsurance

With an eye to preparations for the European Solvency II regulations, demand for innovative and tailored reinsurance solutions is likely to continue growing. This development includes aggregate excess of loss covers, which protect a client’s net retention against significant loss scenarios with a low probability of occurrence. Outside the European Union, too, Hannover Re expects this business to expand in view of the adoption of risk-based models for calculating solvency requirements.

III. Global reinsurance:

Having suffered a heavy burden of major losses in 2011, it was possible to obtain sometimes appreciable price increases in the current financial year for the markets grouped together under the global reinsurance pillar. It is Hannover Re’s expectation that rates will continue to rise as at 1 January 2013 – at least for those regions that were impacted by losses.

  • Global catastrophe business

In global catastrophe business the repercussions of the severe major losses incurred in the previous year can still be felt. In the 1 January treaty renewals as well as in subsequent renewal rounds in April and June/July, reinsurers were able to push through further – in some cases sizeable – price increases. Yet it is noticeable that the momentum of the rate increases is slowly flagging, not least owing to a moderate major loss burden in 2012. Nevertheless, it is to be expected that prices for natural catastrophes will remain on a high level going forward.

North America: The renewals in June/July brought further modest rate increases, although they were less marked than at the beginning of the year. The price rises were driven not least by the previously mentioned adjustments to natural catastrophe models. Steadily rising demand for natural catastrophe covers is anticipated in 2013; even if the major losses in the second half-year are low, further moderate price increases should be possible.

Europe: The coming year is expected to bring growing demand. The key drivers here are the more exacting equity requirements associated with Solvency II and – in this market too – the adjustments made to natural catastrophe models. Not least owing to the moderate major loss situation, prices here are no longer commensurate with the risks. It will therefore be necessary to push through selective price increases.

Japan: As expected, further significant price increases and improved conditions were obtained here for earthquake and typhoon covers on the back of the devastating earthquake in March 2011. The higher price level should again be sustained in the coming year; certain programmes may see additional rate increases.

Australia/New Zealand: In the renewals that took place within the year, further vigorous rate increases were booked – especially for loss-impacted programs. In 2013, too, the positive price trend should be sustained and reinsurance prices can be expected to at least remain stable.

Non-Peak Areas: The severe floods in Thailand have prompted greater risk awareness among reinsurers in smaller markets of certain Asian countries. This is fostering a trend towards corresponding price increases.

  • Global treaty business

Developments in global treaty business vary according to market and region. Markets with particularly notable dynamics are described below:
Emerging Markets: Emerging markets offer considerable growth potential over the long-term, even though economic growth has slowed somewhat as a consequence of the global financial and economic crisis. Overall, 2013 is expected to see a further rise in demand – increasingly for high-quality reinsurance protection. Both in countries belonging to the CEE region and in the markets of Asia and Latin America it should be possible to obtain prices that are commensurate with the risks. In the latter case, there is a concern that reinsurance business is increasingly being hampered by national interests. All in all, a more competitive market environment is anticipated for Latin America.

Agricultural risks: New business opportunities are arising out of the further expansion of public-private partnerships, especially in emerging markets with corresponding agricultural potential. Increasing food needs are driving investments and stronger demand for agricultural covers at insurers and reinsurers. The anticipated proliferation of extreme weather events due to climate change is also causing farmers to increasingly take out protection against possible crop failures. The insurance industry must factor this development into the provision of viable insurance solutions if it is to make the most of the new market opportunities. The price level for agricultural covers is for the most part adequate despite considerable competition.

Outlook

Hannover Re is going into the renewals as at 1 January 2013 in an optimistic frame of mind. Based on its very good positioning in the markets and its financial strength, Hannover Re is a reliable partner for its clients. Thanks to its excellent ratings (“AA-” from Standard & Poor’s and “A+” from A.M. Best) it is able to participate disproportionately strongly in the available favourable market opportunities. The company intends to largely maintain its market shares or to expand them in markets that appear attractive. Both for 2012 and beyond Hannover Re expects further growth. One-third of non-life reinsurance premium alone derives from markets that are posting double-digit percentage growth rates.

In light of the difficult capital market climate, considerable importance attaches to preserving the value of assets under own management and generating a stable return. For this reason, Hannover Re’s investment portfolio is guided by the principles of a well-balanced risk/return ratio and broad diversification.

With a view to ensuring that risks to the reinsurance portfolio remain calculable and exceptionally large losses cannot unduly impact the result, the issue of risk management plays a central role in this regard too. Diversification, for example with respect to reinsurance treaties, lines and business segments, is a crucial factor.

In addition to using traditional reinsurance markets, Hannover Re also continues to transfer insurance risks to the capital market in order to protect against catastrophe risks. “We are currently renewing our ’Eurus‘ transaction with a volume of EUR 100 million”, Mr. Wallin explained. “Eurus III provides coverage for severe windstorm events in various European countries over the next four storm seasons.”

For further information please visit: www.hannover-re.com







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