In view of the heavy losses incurred by the reinsurance industry from natural disasters in the first quarter of 2011, Hannover Re expects the widely varying market hardening observed across the board in previous renewal phases to be sustained.
'Both the treaty renewals in April and those in June/July produced pleasing outcomes for our company. It is our expectation that the favourable trend in reinsurance premiums will continue in 2012; this is true not only of catastrophe covers', Chief Executive Officer Ulrich Wallin stated at a press conference in Monte Carlo. In programmes that were spared losses, however, such as the casualty lines, this tendency made itself felt only to a limited extent. This is due to the unchanged substantial capacities made available by reinsurers, which in some areas continue to clearly exceed demand.
All in all, Hannover Re anticipates stable to rising demand for reinsurance protection, supported not least by the implementation of risk-based solvency regimes - such as Solvency II - in Europe. The latest model adjustments made by Risk Management Solutions (RMS) are also a factor in this development. What is more, vigorous growth in emerging markets such as China and Brazil and in the retakaful sector is boosting demand for reinsurance covers.
The present uncertainties on financial markets and the associated challenge of generating adequate investment income should result in considerable discipline when it comes to technical pricing.
In the treaty renewals as at 1 January 2012 Hannover Re anticipates the following developments for the three pillars of its non-life reinsurance portfolio - namely target markets, specialty lines and global reinsurance:
I. Target markets:
- North America
Hannover Re is confident that even with a moderate hurricane season rates in property business will continue to harden. Key factors here are the aforementioned model adjustments and the strains incurred by the US insurance industry in the wake of the latest tornado and flood events, which cast a particularly long shadow over balance sheet results for the first half-year in both the insurance and reinsurance sectors.
The casualty business written by primary insurers has to date not seen a significant trend reversal towards market hardening, although rates have now bottomed out. Indeed, modest rate increases were observed in the second quarter - for the first time in quite a while. Given the reduced investment income generated by insurers, greater importance attaches to the technical result - hence necessitating rate increases.
Fierce competition continues to prevail in industrial property and casualty business, in spite of the claims frequency which would require a reversal in the current trend.
In the motor sector the Hannover Re Group is looking to improved conditions in original business in both the own damage and liability lines, a development from which it will profit first and foremost in proportional reinsurance. The improved premium level in original business should also have positive implications for non-proportional reinsurance.
II. Specialty lines:
Whilst rate erosion can be observed in some subsegments of specialty lines, it will not call the adequacy of the rate level into question. Premium income will remain stable on account of growing underlying volume effects.
Hannover Re ranks among the market leaders in aviation reinsurance. For 2012 further attractive business opportunities are anticipated; this is especially true of the BRIC markets. Overall, the rate level should remain stable or decline slightly.
In the property and liability lines of offshore energy business Hannover Re is looking to further market hardening; healthy double-digit premium increases were booked in the 1 April renewals. In other segments of marine insurance, too, moderate premium increases should be attainable.
- Credit and surety
Reflecting the recovery in the global economy and improved conditions in both primary insurance and reinsurance over the last two years, loss ratios in credit insurance have fallen sharply. They have returned to the level seen prior to the 2008 financial market crisis, or in some areas are even lower. Insurance and reinsurance prices are expected to show moderate erosion from an elevated rate level.
In the surety and political risk lines, loss ratios are likely to remain on a good level or should at most rise only slightly.
- Structured reinsurance
Driven by more rigorous solvency requirements as well as the need to adhere to compliance standards, demand for structured reinsurance products should continue to grow in 2012. Solvency II, in particular, is boosting demand for tailored reinsurance solutions. Reflecting this development, Hannover Re is already seeing stronger demand in Europe.
III. Global reinsurance:
In the current financial year the major loss burdens incurred by Hannover Re have been concentrated in particular on the markets that make up its global reinsurance pillar, and above all on catastrophe business. The company expects to see price increases here - and not only in those regions that have been impacted by losses.
- Worldwide catastrophe business
In worldwide catastrophe business the effects of the major losses recorded at the beginning of the year, most notably the severe earthquake in Japan, can be clearly felt. Reinsurers were already able to push through appreciable price increases in the April and June/July treaty renewals. It is to be expected that price levels for natural catastrophes will also be higher going forward, since exposures in coastal regions were subject to recalibration in some cases with an eye to the tsunami risk.
Whether or not the market for catastrophe covers also continues to harden worldwide will be dependent, among other things, on the current hurricane season.
North America: The price increases obtained so far were driven in large measure by the updated version of the RMS natural catastrophe simulation model as well as the major losses incurred outside the United States: for 2012 Hannover Re anticipates further growth in demand for natural catastrophe covers. Even if the hurricane season passes off relatively moderately, price rises should still be possible.
Europe: Brisker demand is expected, driven both by the more exacting capital requirements associated with Solvency II as well as the current model adjustments. As a further factor, given the heavy stress that international insurance markets have come under so far as a consequence of the severe natural disasters incurred in the current year, price increases for catastrophe covers are in particular seen in UK and Germany.
Japan: In the aftermath of the severe earthquake and subsequent tsunami in March 2011, prices rose for earthquake and typhoon covers and conditions for reinsurers improved appreciably. It is Hannover Re's expectation that further rate increases can be pushed through in the coming year - not only for the impacted programmes but also for those that were spared losses.
Australia/New Zealand: As anticipated, sharp rates hikes and improved conditions were obtained here on the back of the costly natural disasters. For 2012 Hannover Re expects to see further appreciable price increases.
- Worldwide treaty business
The situation in worldwide treaty business varies according to market and region. Particularly dynamic markets are discussed below:
Emerging markets: Intense competition among primary insurers is, however, accompanied by a growing premium volume, prompting stronger demand for reinsurance solutions. Hannover Re is seeing particularly vigorous expansion in the premium volume in Latin American and Asian markets. With an eye to Eastern European markets, too, the company expects the stable pace of growth to continue unchanged, with reinsurance prices likely to remain commensurate with the risks.
Agricultural risks: The further expansion of public-private partnership schemes, particularly in emerging markets with considerable agricultural potential, is opening up new business opportunities. Population growth and the accompanying increasing need for food are giving rise to investments and a requirement for agricultural covers, with insurers and reinsurers enjoying stronger demand. The pricing level is attractive.
Hannover Re goes into the renewals as at 1 January 2012 in an optimistic frame of mind. Based on its very good positioning in the markets as well as its outstanding financial strength, Hannover Re is a reliable partner to its clients. Thanks to its excellent rating ('AA-' from Standard & Poor's and 'A' from A.M. Best) the company is able to participate disproportionately strongly in favourable market opportunities that present themselves. Hannover Re intends to broadly maintain its market shares and to enlarge them in areas where the markets appear attractive.
'Despite the available market opportunities we are standing by our principle of active cycle management and disciplined underwriting', Mr. Wallin emphasised. 'We see particularly potential in the specialty lines segments and in emerging markets, where we are well positioned.'
Risk management continues to play a crucial role in ensuring that the risk associated with a portfolio remains calculable and that extraordinary major losses cannot take an undue toll on the result. Along with traditional retrocessions - Hannover Re took out additional coverage in the first quarter with protection against US catastrophe risks in an amount of USD 100 million - the company continues to make use of the transfer of insurance risks to the capital market.
With respect to hurricane 'Irene', the company expects a net loss burden in a lower double-digit million-euro range.
Hannover Re is confident of attaining its declared profit target of EUR 500 million if the second half of the year passes off normally. The company is looking to grow its premium volume - provided profitability requirements are met - by 7% to 8% on the Group level.