After four years of declining reinsurance rates the heavy natural catastrophe losses incurred in 2017 and again in 2018 caused the rate level to move higher as 2018 got underway and subsequently stabilise overall as the year progressed. The supply of reinsurance capacity – from both the traditional reinsurance sector and the ILS (insurance-linked securities) market – nevertheless still outstrips demand. In the treaty renewals as at 1 January 2019 the prices that could be obtained for reinsurance programmes and in regions that had been spared losses came under slightly more pressure compared to the situation in 2018. On the other hand, rate increases running into double-digit percentages were recorded for programmes that had once again suffered losses.
Adjusted for exchange rate effects, we boosted our premium volume as at 1 January in traditional property and casualty reinsurance by altogether 15.4% to EUR 6,406 million (EUR 5,551 million). On this date 66% of the traditional property and casualty reinsurance portfolio (excluding facultative Reinsurance, ILS business and structured reinsurance) was up for renewal.
In contrast to the situation just one year ago, alternative capital providers for ILS business took a more restrained approach in the 1 January 2019 renewals. The capacity originating from the ILS sector nevertheless remains a significant part of the reinsurance market.
Reinsurance prices were generally commensurate with the risks in the renewal season at the beginning of the year, and viewed from an overall perspective we were able to secure slightly improved conditions. As one of the world’s leading Reinsurers we continue to benefit from our very robust financial strength as well as a trend among primary insurers towards consolidation of their reinsurance partners. Particularly attractive opportunities to expand the portfolio opened up in Asia, North America and Germany.
Expectations for the development of individual markets and lines in property and casualty reinsurance are described in greater detail below, broken down into the areas of Board responsibility.
|Property & Casualty reinsurance:|
Forecast development for 2019
|Specialty lines worldwide|
|Credit, surety and political risks||+|
|UK, Ireland, London market and direct business||+/-|
|Worldwide treaty reinsurance3||+/-|
|Catastrophe XL (Cat XL)||+/-|
|Structured reinsurance and insurance-linked securities||+/-|
|1 In EUR|
2 ++ = significantly above the cost of capital
+ = above the cost of capital
+/– = on a par with the cost of capital
– = below the cost of capital
3 All lines with the exception of those reported separately
In North America the primary insurance market should continue to develop favourably, also bearing in mind the general economic climate. The considerable losses incurred in the last two years from windstorm events, forest fires and floods further highlighted the benefit of risk-mitigating insurance and reinsurance solutions and led to stronger demand. The North American market is of strategic importance to Hannover Re and over the years we have expanded our long-standing customer relationships and added new clients.
A stable to slightly positive price trend was evident in the treaty renewals as at 1 January 2019. Rates moved notably higher under loss-impacted programmes, while modest price erosion was observed for programmes that had remained loss-free. In US property business we were able to enlarge the portfolio written with existing clients at improved conditions overall. Prices and conditions in US liability business were for the most part on a satisfactory level, enabling us to further expand our premium volume in some lines of this segment. We expect to see a continued positive pricing tendency for the rounds of treaty renewals in June and July 2019 – when the bulk of the loss-impacted programmes come up for renewal. Through our cooperation with insurtechs we are also acting on business opportunities associated with progressive digitalisation. Within our defined risk appetite we are able to comprehensively support our clients who continue to seek out our financial strength.
In Germany , the largest single market within our Continental Europe segment, we were able to consolidate our prominent position in the treaty renewals as at 1 January 2019 and indeed extended it on the basis of specific treaties. Against a backdrop of broadly stable rates and conditions, we expect to book premium growth in the double-digit percentage range overall. After the challenging market conditions seen in industrial fire and property insurance in Germany for quite a number of years, some moves by primary insurers to remediate the business can now be discerned in the market. With this in mind we partially expanded the portfolio in keeping with our selective underwriting policy. In motor insurance, our most important individual line of business, we expect to see a stable premium development. Demand for reinsurance protection has been stimulated by rising awareness of the dangers posed by cyber risks as well as by regulatory requirements.
In the other markets of Continental Europe the picture was a mixed one. Generally speaking, it may be stated that the treaty renewals as at 1 January 2019 saw a demand for more reinsurance protection at stable prices. We achieved particularly pleasing growth in Italy. In Western Europe we maintained the premium level from the previous year. In Eastern Europe price stabilisation was evident; some of the price increases under loss-affected programmes were very significant.
In marine reinsurance the renewals as at 1 January 2019 passed off largely satisfactorily. Rate increases for loss-impacted programmes were in some instances appreciable. Other than that, the Asian market was still shaped by surplus capacity and Continental European programmes also came under modest pressure. The treaty renewals on the London Market for the most part remained on a constant level. Customers were nevertheless differentiated here according to their specific changes in exposures and losses. Owing to our discontinuation of marine acceptances in the London Market as well as some corporate mergers, we anticipate a reduced premium volume in marine reinsurance.
After years of intense competition the consolidation drive in aviation reinsurance appear to have been largely completed. Improved conditions are evident in original business. Similarly, the rate erosion observed in non-proportional reinsurance was extensively halted in this year’s 1 January round of renewals. Based on rising premiums in the original market, we also expect a modest increase for our proportional portfolio.
Following a revival in the global economy in 2018, growth will likely slow in the coming year. As a consequence, the number of insolvencies around the world may rise slightly from the existing low level. Against this backdrop, we expect loss ratios in credit and surety business as well as in the area of political risks to remain stable or increase moderately. In the context of the progressive regional diversification of our portfolio it is our expectation that premium growth will be sustained going forward, although the tempo in credit and surety business will be held back by general economic conditions. In the area of political risks, on the other hand, demand is likely to remain high in view of the elevated risk situation around the world. All in all, we are looking for a stable market environment in the current financial year despite a slowdown in global economic growth. Against this backdrop, we expect to book modestly increased premium income and a good result.
Rates were stable across all lines in the round of 1 January treaty renewals, with modest erosion observed in motor third party liability. Market players now expect the Ogden rate to be increased in 2019, which may lead to an improved claims run-off. To some extent this effect was pre-empted by other market players and prices were adjusted downwards. For our part, however, we maintained our conservative stance on pricing. Prices were also stable for property reinsurance programmes on the London Market. Given the keen focus put on profit, which is pursued especially vigorously by Lloyd’s of London, we expect to see hardening on the primary market. We similarly anticipate positive implications for our portfolio from improvements in the business written by our clients, both in qualitative terms and on the pricing side. For the current year we are expecting a stable premium volume overall.
As already announced in the year under review, Hannover Re and HDI Global have concentrated their primary insurance activities in specialty lines in a new joint venture named HDI Global Specialty SE. The majority interest (50.2%) in Inter Hannover was acquired by HDI Global for this purpose. HDI Global Specialty commenced operational activities on 1 January 2019 and writes agency business and speciality insurance in a range of lines including errors & omissions liability insurance, directors’ and officers’ (D & O) liability insurance, legal expenses, sports and entertainment, aviation and offshore energy. As early as 2019 annual gross premium income is expected to exceed EUR 1 billion. Hannover Re will continue to reinsure a large portion of the business written by HDI Global Specialty. A premium decline will nevertheless be recorded due to deconsolidation in the amount of the former Inter Hannover’s retention.
The current financial year is expected to bring increased demand for facultative reinsurance at improved conditions on the whole. This will be driven by the above-average loss incidence in the previous year and hence also reflects the shift in our clients’ risk appetite. Given our strong focus on the customer, we should be able to benefit disproportionately strongly from the potential market opportunities. We shall enlarge our reinsurance portfolio in those regions and lines where we have been able to push through higher prices. Particularly healthy premium growth is anticipated in the United States, Europe and Southeast Asia. Overall, we expect to see an increase in premium income for our facultative business in the current financial year and better results than in 2018.
Based on our progressive accumulation of know-how and enhanced customer support, we similarly anticipate a rising premium volume and continued good results for our specialty lines.
Insurance markets in the Asia-Pacific region should stay on their growth track in 2019. Consequently, we see good opportunities here to enlarge our portfolio.
Our organisational set-up with decentralised underwriting at our local branches – under strategic management from Hannover Home Office – is very well received by our customers and will enable us to put our Group capital efficiently on risk going forward, just as we have in the past. The extent to which natural catastrophe losses from typhoons, earthquakes and floods in Japan, for example, will influence general reinsurance capacities and prices in Asia remains to be seen.
As far as our business in Japan is concerned, it is our expectation that the previously mentioned losses will bring higher reinsurance prices for the renewals on 1 April, especially for natural catastrophe covers. Certain customised individual transactions that are currently in the initiation phase will likely help us to significantly grow our portfolio in Japan.
China continues to be the focus of our activities in Asia. Particularly against the backdrop of rapid digitalisation, we are seeking new business opportunities with existing and new partners. In traditional reinsurance business we consider ourselves optimally positioned but anticipate a continued oversupply of capacity, which means that a greater emphasis on innovation will play an important strategic role in the cultivation of new business.
The markets of South and Southeast Asia similarly offer a broad spectrum of growth opportunities. Our activities are focused on supporting our customers in the development of products, processes and systems.
The renewal season in India as at 1 April 2019 will see efforts to bring about a qualitative improvement in conditions as well as to further expand the business plan pursued by our branch in Mumbai. Given appropriate conditions, we would be prepared to expand our business substantially in keeping with our ambitions for the Indian market.
In Australia and New Zealand the market players expect to see clear improvements in conditions in the run-up to the 1 January and 1 July renewals. Demand for natural catastrophe capacity is still rising, which should have implications for pricing in Australia and New Zealand too.
In South Africa our organisation is well established within the local insurtech ecosystem. Over the coming years we want to extend this to the continent as a whole, since we view this as a promising strategy for the profitable growth of our portfolio. Based on a stabilisation in reinsurance prices, we expect to book premium growth for our reinsurance and specialty business in the current year.
The market for reinsurance is just as competitive in Latin America as it is in other insurance markets, although the picture shows sometimes sharp variations from country to country. In view of a number of large losses in the year under review as well as a shortage of capacity for proportional earthquake covers, conditions for these programmes improved significantly in the renewals as at 1 January 2019 compared to the beginning of 2018. Based on our good market position and superb financial strength, we benefited from offers of new business and improved treaty conditions in the renewals. In addition, we shall continue to pay closer attention to an adequate level of primary insurance rates in Latin America and the Caribbean and we shall make our capacity available accordingly. Thanks to our selective underwriting policy and needs-oriented reinsurance solutions, and reflecting the improvement in primary insurance conditions, it is our assumption that we shall be able to profitably expand our portfolio in Latin American markets and the Caribbean in the current 2019 financial year.
Hannover Re expects demand for insurance against agricultural risks to continue rising: the increasing need for agricultural commodities and foodstuffs as well as the growing prevalence of extreme weather events are generating stronger demand for corresponding reinsurance covers, particularly in emerging and developing markets. At Hannover Re we engage both in traditional reinsurance and in intensified cooperation with our customers and partners on the development of new tools for primary insurance. In this regard, we see further growth potential for index-linked products as part of direct and indirect insurance concepts in emerging and developing economies. The more widespread implementation of public-private partnerships offers us new opportunities to write profitable business in markets that have still to establish themselves.
In our retakaful business we anticipate a predominantly soft rate level on account of the competition-induced excess supply of capacity as well as a comparatively low oil price. Risk selection and good customer relations will therefore play a pivotal role in our underwriting of profitable business. Our focus in 2019 will be on specialty lines. We are also moving forward with our cautious entry into proportional motor business because the available rates are rising on the back of newly implemented motor tariffs in 2017. All in all, we expect the premium volume to remain stable.
In natural catastrophe (Cat XL) business we expect the additional inflow of capacity from the capital markets to be on the moderate side. This is due to the loss experience of 2017 and 2018 as well as a pricing response that many capacity providers found disappointing. Given that reinsurance rates remain low, it is our expectation that the retentions carried by primary insurers will continue to be on a low level.
In the treaty renewals as at 1 January 2019 we obtained appreciable rate increases under loss-impacted programmes. All in all, though, the Cat XL market remains challenging. In areas that had escaped losses it was at most possible to achieve minimal price increases in occasional instances. Furthermore, the tendency towards multi-year programmes and early treaty renewals still prevails.
In general terms, we plan to grow our business only under selected programmes given the current market conditions. This is motivated by, among other things, the fact that certain cedants now tend to request significant capacities solely from preferred business partners – including our company.
When it comes to the 1 April renewals in Japan, the previously mentioned typhoon losses could appreciably affect demand for reinsurance capacity. It is our expectation that the rise in prices will be in the order of 30%. For the 1 June and 1 July renewals we anticipate stronger rate increases than those seen as at 1 January, because by that stage a clearer picture will emerge of the results achieved by reinsurers and hence the pressure on capital market investors will likely grow in light of market and interest rate factors.
We anticipate further attractive opportunities for leading reinsurers since larger companies will continue to follow the trend towards purchasing worldwide covers. The number of reinsurers for such programmes will steadily diminish. What is more, there will be no easing in the considerable pressure when it comes to mergers and acquisitions. In view of the sizeable losses from floods and forest fires, primary insurers in the affected regions will likely seek to secure additional coverage.
Owing to the implementation of risk-based models for calculating solvency requirements not only within but also outside the European Union, demand for structured reinsurance products is likely to keep on rising. The key driver here continues to be the growing integration of reinsurance into insurers’ risk management as a means of offsetting the increasingly exacting capital requirements placed upon these companies. In addition, the increasing pressure on the profit margins of our customers around the world is creating a greater need for tailor-made reinsurance solutions that can optimise the cost of capital.
In the area of insurance-linked securities (ILS) we essentially expect to see continued growth in demand. Investors are seeking a negative or minimal correlation with other financial investments and hence greater diversification. We are responding to this market situation with a strong emphasis on service, offering individually tailored solutions – from collateralised reinsurance to the transformation of catastrophe bonds – for property and life reinsurance risks. Over the coming years we expect our ILS activities to deliver a positive and consistently rising profit contribution. The capital market remains an important element in the retrocession coverage taken out by our own company. For example, we were able to renew the protection cover for Hannover Re known as the ‘K cession” – which has been placed inter alia on the ILS market since 1994 – with an increased capacity of roughly USD 650 million (USD 600 million) for 2019.