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Hannover Re improves its leading position in the area of alternative risk transfers

Portfolio-Linked Swap finalized with North American institutional investors.


In August 1992 Hurricane Andrew caused an enormous insurance loss in southern Florida totalling USD 16,500,000,000. An amount which, up to that point, had never before been reached in the international insurance industry. As a result, numerous primary insurers and reinsurers went into bankruptcy or were forced to curtail their activities. Worse still for primary insurers and reinsurers was the realization that a three times greater loss could have occurred had the hurricane come ashore 30 kilometers further north in the center of Miami. As a consequence, primary insurers and reinsurers found that they were unable to access sufficient reinsurance coverage.

Reinsurance experts estimate the highest possible insured loss in the United States at over USD 100,000,000,000. Against this, a maximum combined primary insurance and reinsurance capacity of USD 40,000,000,000 is estimated to be available. This led to the idea that the resources of the capital markets could be utilised to cover the existing capacity shortfall. There followed an infusion of approximately USD 5 billion into the Bermuda reinsurance markets through conventional means and the limited success of the first formation of reinsurance derivative products (CBOT Cat, Futures). Hannover Re, in early 1994, was the first to successfully bridge the gap between Reinsurance and Capital Markets with an USD 85 million transaction.

Through the transaction, Hannover Re was able to secure for a period of up to six years a substantial additional capacity that it could use for business expansion and, above all, enhance profits. Investors welcomed the opportunity to optimise their portfolios through the addition of this non-correlating product with above average returns. The project was a complete success and led to several imitation attempts, of which only one has been successful to date.

On the evening of November 22, 1996 Hannover Re confirmed its leading role in the area of alternative risk transfer through the conclusion of a second transaction. Through the use of a portfolio-linked swap, an additional USD 100,000,000 in risk capital was secured for the next five to seven years. This will allow Hannover Re to take on additional lucrative business in selected market segments.

The swap was placed with a small group of institutional investors exclusively in North America. The symbiosis between reinsurers and investors exists in that the investors are providing risk capital for a defined reinsurance portfolio and cover losses above a previously agreed loss ratio. In return investors receive a share of the profits, which can be very high, if losses are below the reference loss ratio. Advantages for the investor are a share in a proven, well managed reinsurance portfolio and a better mixture and diversification of their investment portfolio. Hannover Re maintains an equal share with its partners in the subject reinsurance business which provides the investors with an added comfort.

The Hannover Re intends to expand its leadership position in the area of alternative risk transfer and will attach priority to investment in this strategic business segment. In this connection, a joint venture together with an, as yet unnamed, "AAA" rated European Bank and American and British financial market experts has been formed. The RISConsulting Group LLC in Boston, will pursue the development, structuring, realization, and marketing of modern risk transfer products for insurers, reinsurers, as well as financial institutions and industrial corporations.

In the future Hannover Re plans to expand the new business segment of alternative reinsurance products to cover other areas beyond natural catastrophes. Planned are the securitisation of acquisition costs in life reinsurance as well as the insuring of political risks and harvest crop claims.