Overview

After four years in a row of low major losses and good results for all market players, property and casualty reinsurance is once again seeing intense competition in the current financial year. This is being driven above all by the continued abundant oversupply of reinsurance capacity attributable to the fact that Reinsurers have been able to boost their capital positions – on the back of minimal large loss expenditure – and also because capital has flowed in from the market for catastrophe bonds (ILS).

These factors also shaped the treaty renewals as at 1 January 2016, the date when some 65% of our property and casualty reinsurance portfolio (excluding facultative business and structured reinsurance) was renegotiated. Despite sometimes appreciable price erosion, we were broadly satisfied with the outcome of the renewals – even though the rate quality of the renewed portfolio was somewhat lower than in the previous year. Virtually unchanged conditions and stronger demand for multi-year covers are likely indications that the current soft market phase is bottoming out.

The latest round of renewals showed that financially robust reinsurers such as Hannover Re are more highly sought-after by cedants. Based on our excellent ratings, our long-standing customer relationships and our profit-oriented underwriting policy, we are in a good position to adapt to the soft market conditions. Hannover Re continues to practise its systematic cycle management combined with rigorous underwriting discipline and trusts in a broadly diversified portfolio of high-quality existing business, complemented by opportunities that may arise in niche and specialty lines.

Property & Casualty reinsurance: Forecast development for 2016
Volume1Profitability2
Target markets
North America3+
Continental Europe3+/-
Specialty lines worldwide
Marine+
Aviation-
Credit, surety and political risks+
UK, Ireland, London market and direct business+/-
Facultative reinsurance+
Global reinsurance
Worldwide treaty reinsurance+
Catastrophe XL (Cat XL)-
Structured reinsurance and insurance-linked securities+/-

Expectations for the development of our property and casualty reinsurance business are described in greater detail below.

Target markets

North America

In North American primary insurance, where rate increases have been observed since 2011, softening is likely to emerge in the market in 2016 – and this could increasingly lead to rate reductions for major risks. The absence of sizeable claims expenditure on natural disasters and individual risks continues to make itself felt on the reinsurance side and will sustain the trend towards rate erosion in property and – to a lesser extent – casualty business, albeit in a more muted form. Mergers and acquisitions in the primary market will lead to a shakeup in reinsurance purchasing over the long term; in the short term, however, we see more opportunities than risks, which Hannover Re will be able to leverage thanks to its long-standing close and established customer relationships.

The latest round of renewals offered increasing indications of a bottoming out in both the property and casualty lines. We are adhering to our strategy of a margin-oriented underwriting policy, even if this compels us to forego premium growth. Nevertheless, in view of our long-standing and robust customer relationships, we expect to maintain our presence even in the soft market. Overall, then, we were satisfied with the outcome of the renewals as at 1 January 2016. The rate erosion has slowed somewhat. Modest rate reductions were recorded in non-proportional property business, especially under profitable loss-free programmes. On the other hand, premium increases were booked in all three subsectors of US liability business (standard, special and professional liability) – while conditions under proportional treaties remained stable. All in all, the premium volume for the North American portfolio renewed as at 1 January climbed by around 9% – in part due to the expansion of customer relationships. As things currently stand, we expect to see further intensification of competition in this segment in the treaty renewals as at 1 June and 1 July 2016 – the time of year when catastrophe XL covers, in particular, are renegotiated. On the whole, our North American business is expected to deliver slightly higher premium volume in the current financial year.

Continental Europe

In Germany, the largest single market within our Continental Europe segment, Hannover Re was able to further cement its excellent position. Hannover Re is active in this market through its subsidiary E+S Rück. Here, too, competition nevertheless remained keen. The increased retentions carried by larger clients were a particularly significant factor in the 1 January renewals, when virtually our entire portfolio was renegotiated. In motor business, the most important single line, we expect original rates to rise and have increased our shares accordingly. Moderate improvements were also possible in homeowners comprehensive insurance. The quality of results in non-proportional motor liability business will continue to improve due to better conditions as a consequence of higher priorities. Unfortunately, this will also entail accepting a decrease in premium.

Fierce competition and the large number of basic losses put adequate results in industrial fire insurance out of reach. With this in mind, we continued to write our business here very selectively. Our total portfolio in the domestic German market is expected to show a slightly reduced premium volume.

In the other markets of Continental Europe the picture was a mixed one: the expansion of existing customer accounts in France enabled us to offset the pressure on prices in loss-free programmes and the effect of discontinued treaties. In Northern European countries we were able to maintain our position as one of the preferred reinsurance providers. The markets of Southern and Eastern Europe were considerably more competitive. Broadly speaking, though, we still consider reinsurance prices here to be commensurate with the risks. Most notably, proportional and non-proportional treaties offering sufficient capital relief for the Solvency II requirements that have entered into force are enjoying a surge in demand. We were nevertheless selective in our underwriting approach with an eye to our minimum margin requirements.

All in all, we booked a moderate premium contraction in the treaty renewals for Continental European markets.

Specialty lines worldwide

Marine

In marine reinsurance we expect to see a sharp decline in rates for the 2016 financial year despite the sizeable number of large losses. Demand for primary insurance in the area of offshore energy risks is soft on the back of low oil prices. Combined with high capacity and fierce competition throughout the entire marine insurance market, our customers have booked reduced premium income. When it comes to our own portfolio, we anticipate a lower premium volume overall in 2016.

Aviation

The significant major losses incurred in aviation reinsurance in 2014 and 2015 have failed to bring about long-term stabilisation of rates. Although rising passenger numbers and fleet values are creating stronger demand for reinsurance in the original market, we anticipate a continued abundant oversupply of insurance capacities and sharply lower rates. With this in mind, we are scaling back our involvement and our market share in the aviation sector, and we expect to book a sharp contraction in premium volume.

Credit, surety and political risks

The premium volume in the area of credit, surety and political risks is expected to remain virtually unchanged in 2016. Slowing growth in China and the moderate rise in loss ratios in emerging markets will impact our business. While the risk appetite of primary insurers has grown steadily in recent years, we do not now anticipate any further increases in the premium that they retain for own account. Overall, leaving aside certain exceptions principally in the area of political risks business, it is our expectation that conditions will come under only slight pressure in 2016. Against this backdrop, the segment is expected to deliver a moderately improved profit contribution.

United Kingdom, London market and direct business

In the face of protracted competition we expect to see declining rates for our reinsurance business in this area in 2016, especially in the property lines. In non-proportional UK motor business, on the other hand, we are benefiting from stable rates and growth in the underlying business. Further risk selection and increased diversification should serve to boost the portfolio quality of our direct business and deliver stable earnings in 2016. In the treaty renewals as at 1 January 2016 we largely preserved our portfolio thanks to our established customer relationships, while we reduced shares in treaties that had come under heavier pressure. For the current year we expect to book a stable or slightly higher premium volume.

Facultative reinsurance

As is also the case in obligatory reinsurance, the soft market phase prevailing in facultative reinsurance is likely to continue in 2016. A revival in offshore energy business is not to be expected in view of reduced investment in the construction of drilling rigs due to the low oil price. Nevertheless, by taking a selective approach we also see attractive business opportunities. For example, we anticipate stronger demand in areas such as covers for renewables and cyber risks. An increased focus on US casualty business should also open up new prospects. In addition, thanks to our very good rating we should continue to profit from the pooling of reinsurance cessions on the part of large primary insurance groups. Our portfolio of facultative risks is expected to deliver a slightly reduced premium volume with continued healthy profitability in the current financial year.

Global reinsurance

Worldwide treaty reinsurance

The Asia-Pacific markets continue to rank as growth markets. Along with sustained rising demand for insurance products among the expanding middle classes of many emerging markets, regulatory changes – above all in China and India – are also having favourable implications for Hannover Re’s positioning. In certain Asian countries, on the other hand, moves to reduce the outflow of reinsurance premiums into foreign markets are having adverse impacts.

The Japanese portfolio of the Hannover Re Group is expected to see slight erosion of the premium income but continued satisfactory profitability. Our positioning in this important market is nevertheless very good, giving us a range of excellent options for responding to future market changes.

Our reinsurance business in China is expected to deliver another significant surge in premium growth. The regulatory changes ushered in with the adoption of the C-ROSS solvency regime on 1 January 2016, Hannover Re’s local presence and our strategy of building stronger customer relationships with a diversified business volume will support the growth of the portfolio.

The region of South and Southeast Asia should deliver continued growth, although it will be somewhat softer than in the previous year. Consequently, our portfolio here should show a further rise in premium income due to special volume-oriented and product initiatives that have already been launched. Rates for these initiatives are expected to be adequate.

In Australia and New Zealand we shall continue to systematically leverage our strategically important local presence and the company’s financial strength in order to further expand our customer relationships in the region and hence moderately boost our premium volume. We shall devote special strategic attention here to the provision of holistic customer care and the cultivation of niche business.

In South Africa a risk-based solvency system known as SAM (Solvency Assessment and Management) is to be implemented for the insurance industry during 2016 or 2017. We expect the premium for our reinsurance portfolio and specialty business to contract in 2016, in part owing to exchange rate effects.

The market and the placement of reinsurance cessions in Latin America are just as fiercely competitive as in other regions. Thanks to our exceptionally good position in this region and our outstanding financial strength, we expect to achieve prices that are commensurate with the risks in the main renewal season as at 1 July 2016 – something which we were also able to do in the 1 January renewals. Despite the difficult state of the market we succeeded in holding our portfolio stable thanks to our focus on Latin America as a whole. In Argentina – one of the largest markets in Latin America – we anticipate a more business-friendly policy after the change of government at the end of 2015. To this extent, we remain confident of generating further profitable growth for our portfolio from Latin American markets in the current financial year by adhering to our selective underwriting policy.

Hannover Re expects demand to continue rising for coverage of agricultural risks. The increasing need for agricultural commodities and foodstuffs as well as the growing prevalence of extreme weather events are generating stronger demand for reinsurance covers, particularly in emerging and developing markets. In addition, the decision was taken at the Paris Climate Conference in December 2015 to insure a further 400 million people in poor and at-risk nations against the effects of climate change by the year 2020. In this regard, we see further growth potential for index-linked products among direct and indirect insurance concepts in emerging and developing countries. Hannover Re therefore expects its premium to come in higher for the current financial year.

We expect to write further profitable business on the level of the previous year for our retakaful portfolio in the current financial year.

Catastrophe XL (Cat XL)

An oversupply of reinsurance capacity continues to be the hallmark of natural catastrophe business. The inflow of capital from alternative and ILS markets slowed over the course of the year. The current soft market phase will only come to an end when the majority of market players reach a level of profitability that is insufficient – whether through high loss expenditures, inadequate reserving levels or influencing effects from the capital market. In the 1 January 2016 treaty renewals rates declined by around 8% as natural catastrophe losses remained below expectations. For the full financial year we therefore anticipate reduced premium income.

Structured reinsurance and insurance-linked securities

With the implementation of risk-based models for calculating solvency requirements not only within but also outside the European Union, we anticipate good business opportunities in our structured reinsurance business. The key driver here is the growing integration of reinsurance into insurers’ risk management as a means of offsetting the effects of the increasingly exacting capital requirements placed upon them. The adoption of C-ROSS in China means that primary insurers require less capital for motor business (70% of property and casualty reinsurance business). Demand for quota share reinsurance arrangements offering solvency relief may therefore diminish.

In the area of insurance-linked securities (ILS) we expect to see steadily growing demand. Investors are seeking a low correlation with other financial investments and hence the diversification that this brings. What is more, the market for insurance risks is perceived by investors as relatively attractive compared to other investments. We are responding to this market situation with a strong emphasis on service, offering individually tailored products – from collateralised reinsurance to catastrophe bonds – and extending our range of services for life reinsurance risks. Over the coming years we expect our ILS activities to deliver a positive and consistently rising profit contribution.

In keeping with our strategy of “Long-term success in a competitive business”, we have adjusted to this soft market phase in property and casualty reinsurance. With an expense ratio well below the average of our competitors and reserves that are calculated on a highly conservative basis, we are in a position – subject to normal major loss expenditure – to achieve good results. This is further supported by our good diversification across regions and lines of business.

 

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