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Successful renewal of business under difficult conditions

  • Slight growth in 1997 despite keen competition

  • Niches in market secure profitability

Hannover, 10 April 1997:

A common procedure in non-life is to re-negotiate (renew) reinsurance treaties once a year. With a few exceptions - in particular Japan and Korea (1 April) and Australia and New Zealand (1 July) - the bulk of renewals incept on 1 January of each year. The reinsurer's renewal season therefore begins some 8 - 10 weeks prior to 1 January, determining the general terms for the new year of business. Reflecting the great significance of this procedure and to provide internal information on the development of individual divisions and regions, a renewals conference ist held in the offices of Hannover Re each March where the market managers present the results of their negotiations with customers (direct insurers, ie, cedants) and provide information on special features in their markets.

This InfoLetter is intended to provide an overview of the major results of this year's renewal conference. Specific comments on individual markets which we have defined as preferred areas are summarised in the Annex. Prices, terms and conditions in reinsurance follow a cyclical pattern. Periods of over-capacity and keen, in some cases aggressive, competition are regularly followed by periods of short capacity and above-average profit potential. Such profit potential in "harder" periods attract new suppliers of reinsurance coverage, subsequent competition then once again returning things to normal, with terms and conditions eventually becoming inadequate. Since the rates and terms obtained in hard times may go beyond underwriting requirements as such, the subsequent down-phase will not lead directly to inadequate terms and conditions. Conversely, however, the "soft" phases in the market tend to be much longer than the "hard" periods. A soft market is therefore the normal case for the reinsurer, requiring him to apply his management skills and qualities accordingly. Throughout all regions and lines of business, the reports from our market managers confirm that the last "hard" market cycle reached its climax in 1994 and that since then we have been on the way back to "normal".

These general statements reflecting the overall situation should not however lead to the false conclusion that the reinsurance market is developing in the same direction worldwide. The USA, for example, has always been a market with its own development trends, just as the Continental European markets lean more towards continuity with less pronounced cyclical ups and downs. By contrast, the Commonwealth countries traditionally influenced by the London market (and in particular by Lloyd's) are characterised far more by a cyclical pattern of business. It is also important to note that keen competition in the direct insurance markets may become a further negative factor, with any deterioration of conditions exerting a direct effect on reinsurers in the case of proportional reinsurance. In non-proportional reinsurance, on the other hand, prices, terms and conditions are determined independently of the direct insurance market, giving the reinsurer a better opportunity to avoid negative trends in direct insurance whenever the market turns "soft". In order to excel in a soft market environment a company requires a clear and unambiguous strategy. For the Hannover Re this means the following:

  • clearly defined minimum rates of return applied specifically to all operative areas.

  • The minimum target return applied within our strategy is 750 basis points above the 5 year average return generated by 10-year German government bonds. Applying a proprietory risk-based capital model, we have broken down this general target into 36 operative cells providing our underwriters with an orientation as to what minimum margin they must achieve in accepting reinsurance business.

  • The focus must clearly be on markets and classes of business with an above-average profit potential. In many cases we should seek to reach strategic targets only in the medium or long term, or where market conditions are acceptable.

  • We must not accept any compromises in making allocations to claims reserves, in particular our IBNR reserves.

  • The general philosophy must be to focus on profits, not on volume. Our centralised management system offers optimum conditions for this approach.