Monte Carlo, 14 September 2015:
Property and casualty reinsurance worldwide remains highly competitive owing to the absence of large losses, while the healthy levels of capitalisation enjoyed by primary insurers continue to be reflected in a tendency towards higher retentions. The supply of reinsurance capacity consequently still exceeds demand. As a further factor, the supply of reinsurance is being boosted by continued growth of the ILS market (including catastrophe bonds).
"Irrespective of this, we are seeing a reduction in the oversupply of reinsurance capacity compared to the previous year. Most significantly, the resurgent economy in the United States, the world's largest reinsurance market, is sending out positive signals for the premium trend in developed markets", Chief Executive Officer Ulrich Wallin stated at a press conference in Monte Carlo.
Nevertheless, Hannover Re continues to adhere to its selective underwriting policy. "We are concentrating on treaties under which, according to our assessment, an adequate price level can be achieved", Mr. Wallin added. In view of the reduced investment income associated with low interest rates on capital markets, pricing discipline continues to be of central importance.
For the treaty renewals as at 1 January 2016 Hannover Re expects the general environment to remain largely unchanged – insofar as the current year once again does not bring any market-transforming major loss events. Against this backdrop and given the increased frequency of man-made losses, Hannover Re anticipates that reinsurance prices will stabilise in some areas, with certain lines and markets even offering scope for rate increases.
Hannover Re expects particularly good growth potential in Asian and Latin American markets as well as for business with agricultural risks. Furthermore, a constantly changing risk landscape in (re)insurance business is prompting the development of new products. Hannover Re sees an elevated risk potential on account of increasingly widespread digitalisation and hence anticipates rising demand for products to protect against cyber-risks. Demand for solutions designed to provide coverage against extremes of weather is also likely to continue growing in the future. In these areas Hannover Re partners with its customers to support product development and market launch.
For the three pillars of its property and casualty reinsurance portfolio – namely target markets, specialty lines and global reinsurance – Hannover Re anticipates the following developments in the treaty renewals as at 1 January 2016:
I. Target markets:
The North American primary insurance market has stabilised, as a consequence of which rates are now moving sideways. The continued absence of sizeable natural catastrophe events and other large losses is, however, making a mark on the reinsurance side, with the result that a certain pressure can be felt on rates in property and to a lesser extent casualty business. In the area of non-proportional reinsurance programmes with a good multi-year loss experience, Hannover Re assumes that prices will continue to trend lower. Conditions in proportional reinsurance should remain adequate, although here too they are coming under increasing pressure.
Mergers and acquisitions will lead to realignments on both the primary and the reinsurance side, from which Hannover Re can profit extensively thanks to established customer relationships cultivated over many years.
Despite new capital flowing into the market, the company expects to be able to profitably expand its customer relationships going forward, as it has in the past.
The markets of Northern, Eastern and Central Europe are grouped together under Continental Europe. The largest single market is Germany.
Germany: Market conditions in Germany are under less pressure in some lines than in other countries owing to heavy losses incurred in prior years. Most notably, motor insurance has seen a pleasing trend since 2014. For the coming year it is to be expected that premiums in motor business – the most important single line – will continue to rise. Despite sustained rehabilitation efforts the situation in homeowners' comprehensive insurance remains under strain owing to the storms "Mike" (March 2015) and "Niklas" (April 2015) as well as the hail event "Siegfried" (July 2015). Developments in the fire line, where an elevated frequency of mid-sized losses has been recorded in the current year, are being monitored.
For its German business Hannover Re therefore expects to see stable rates overall in the coming round of renewals.
Central and Eastern Europe: Political tensions, repercussions of the financial and economic crisis and heightened competition among primary insurers have done nothing to change the fact that increased demand exists for high-quality reinsurance solutions. In France established reinsurers are able to act on attractive business opportunities despite considerable pressure on prices. Growth rates in Russia are still better than the European average in spite of brisk competition. All in all, Hannover Re continues to anticipate strong growth in premium volume from a medium-term perspective in the markets of Central and Eastern Europe – with reinsurance prices likely to remain broadly adequate.
II: Specialty lines:
Contrary to original expectations, the losses incurred in 2014 and 2015 have not brought about long-term stabilisation of the rate level in airline business. Irrespective of rising fleet values and passenger numbers, Hannover Re expects the prevailing soft market phase to persist on the back of historically low accident rates and the unchanged abundant supply of insurance and reinsurance capacities. The market for war covers similarly failed to realise the premium increases that had initially been anticipated.
After years of satisfactory rates marine reinsurance now finds itself experiencing a soft market phase. As a consequence of low loss expenditure and the resulting surplus capacity, Hannover Re expects rates for the reinsurance of pure marine portfolios to undergo further slight softening. In the offshore energy sector low oil prices have eroded demand for primary insurance coverage. Combined with considerable overcapacity and fierce competition, this has led to a reduced premium volume – sometimes markedly so – on the customer side. Despite a number of sizeable losses in the course of the current 2015 financial year, the company anticipates further slight softening overall on the marine reinsurance market.
Credit and surety
Loss ratios in credit and surety insurance have remained broadly unchanged relative to previous years and are on a good level. A moderate increase in claims costs can, however, be observed in emerging markets. The same is true of the political risks segment, where loss ratios are rising slightly from a low level. All in all, prices in primary insurance and on the reinsurance side should hold stable or at most come under merely moderate pressure.
III. Global reinsurance
Cat XL business
Natural catastrophe business is still witnessing an oversupply of reinsurance capacity; with the exception of the US market, demand has remained constant. As a further factor, the absence of major losses continues to add to the pressure on prices. A moderation in the price reductions has, however, become evident over the course of 2015. These market conditions led to the expected consolidation activities in the form of mergers and acquisitions.
Hannover Re anticipates the following developments on individual markets:
North America: In the United States prices have declined on a risk-adjusted basis by single-digit percentages, driven principally by the absence of large losses. Florida has seen an increase in demand for reinsurance because many insurers purchased their covers on the private market rather than from public insurance institutions, as had previously been the case. The future price development in the US will be significantly influenced by the course of this year's hurricane season; there were, however, already indications in the renewals as at 1 June/1 July 2015 that reinsurers are not prepared to accept any further price reductions.
Europe: Prices on European reinsurance markets were also under pressure in 2015. Programmes that have remained loss-free in recent years will likely see further rate cuts in the coming year.
Japan: Additional significant rate reductions in the renewals as at 1 April 2015 have resulted in a level being reached that from an underwriting standpoint leaves no room for further price erosion.
Australia/New Zealand: The continued uncertainty surrounding the run-off of losses from the New Zealand earthquakes of 2010 and 2011 has had a stabilising effect on rates in New Zealand and Australia.
Worldwide treaty business
Developments in worldwide treaty business varied across markets and regions.
Asia-Pacific: Intense competition continues to be the hallmark of these markets, causing rates to decline overall. The most recent large losses should, however, serve to subdue any further rate erosion. In view of the prevailing soft market conditions, Hannover Re concentrates on its good, long-term customer relationships and supplements its portfolio with profitable niche business.
Latin America: Generally speaking, the countries of Central and South America are continuing to grow, albeit at a varying pace. The existing surplus capacity has prompted rate decreases, the extent of which depends upon the line of business and type of cover. Many countries in Latin America nevertheless continue to see increased demand for high-quality protection, hence enabling financially robust reinsurers to write business at adequate prices.
Agricultural risks: The growing need for agricultural commodities and foodstuffs as well as the increased prevalence of extreme weather events are fuelling demand, especially in emerging and developing countries. Overall, the increasingly widespread implementation of public-private partnerships coupled with a continuously expanding range of products is opening up more opportunities to generate profitable business.
Insurance-Linked Securities: Hannover Re accesses the ILS market to obtain protection for its own catastrophe risks, in the role of an investor and for the transfer of its clients' insurance risks to the capital market. The latter primarily takes the form of collateralised reinsurance arrangements, although catastrophe bonds are also issued for this purpose. In 2015 Hannover Re was active as a service provider for a number of clients, helping to transfer altogether USD 1.5 billion in exposure to the capital market in the form of bonds. Hannover Re expects demand in this area to grow steadily over the coming years.
Structured reinsurance / Advanced Solutions: In view of the adoption of risk-based models for calculating solvency requirements not only within but also outside the European Union, Hannover Re expects to grow this business. Demand for innovative and bespoke reinsurance solutions continues to rise, supported by changes in the buying habits of many clients.
Hannover Re expects the pressure on prices and conditions to ease in the round of treaty renewals as at 1 January 2016. Rising demand for reinsurance protection should have a favourable effect overall on the market development. Reinsurers with an excellent rating are likely to benefit here because ceding companies are imposing even more exacting standards on financial strength. Based on its unchanged excellent rating and good position in many markets, Hannover Re anticipates favourable business opportunities in 2016. In this context the company remains committed to its broadly diversified portfolio of high-quality existing business, complemented by opportunities that arise in niche and specialty segments.
The partnership-based customer relationships entered into by Hannover Re, which are distinguished by their reliability and stability, are a vital component of the company's successful business model. Above and beyond its solutions in the field of traditional reinsurance, the company develops innovative coverage concepts that enable it to tap into fresh profit opportunities and offset any declines in conventional business.
In view of the favourable development of the current 2015 financial year, Hannover Re has revised its expectations upwards. The company expects the gross premium volume for the Group – based on constant exchange rates – to grow by around 5 % to 10 %. Subject to the proviso that major loss expenditure does not significantly exceed the expected level of EUR 690 million and provided there are no unforeseen adverse movements on capital markets, the company anticipates Group net income in the order of EUR 950 million for 2015.