COVID-19 uncertainty triggers a flight to quality by cedants in Asia

The uncertainty generated by COVID-19 has triggered a flight to quality towards larger, financially stronger reinsurers by Asia cedants, a phenomenon that is itself an exaggeration of a longer-term trend in cedants’ buying habits.

That is the view of Sven Althoff, member of the executive board at Hannover Re, speaking during the SIRC 2020 Re-Mind virtual conference, taking place this week in place of the physical 17th Singapore International Reinsurance Conference, which has been rescheduled to November 2021.

“There is a flight to quality globally as businesses gravitate towards the well-rated reinsurers with strong solvency ratios—and we are seeing that in Asia too,” Althoff said.

“That trend goes hand-in-hand with the wider issue of how cedant companies are buying these days. They are taking a more holistic view on their reinsurance relationships, preferring to work with a smaller number of big players globally instead of a larger number of reinsurers on different product lines.”

Daniel Gunawan, chief executive officer of Hannover Re’s Malaysia branch, added that in Asia, Hannover Re is increasingly being asked by brokers to come on to a panel or take a bigger share because of this logic.

“It is because of the uncertainty. There is a stronger desire for quality reinsurance capacity. In addition, we are being asked to look at specific challenges and offer bespoke solutions—things we are very good at.”

Gunawan added that clients are also increasingly seeking capital management options as they look to de-risk their balance sheets in the context of recent loss events and economic shocks.

“We are seeing more enquiries of that nature,” he said.

Strategic plan
Althoff said this trend ties in nicely with Hannover Re’s wider strategic aims. The reinsurer works on the basis of three-year strategic plans, the next of which will start in 2021. He says that the company plans to invest more in innovation and digitisation and plans to work closely with clients to help them develop new product lines and grow market share.

“We will look at clients more holistically and help them grow and develop,” he said.

Within this strategy, the firm sees great potential across the Asia-Pacific region. He said that although Hannover Re is already well represented in the region, it expects a combination of macroeconomic factors, higher insurance penetration and the growth of the middle class in many countries to lead to strong growth.

“We will use our existing infrastructure to work with clients on product development and product-orientated initiatives to help them develop and grow,” he said.

“We will do this through our regional offices, using our proximity to clients as an asset. We will also invest in talent management—we want to ensure that Hannover Re is seen as an attractive employer with an emphasis on strong succession and leadership across the board.”

Gunawan added that the strongest growth in emerging markets in the region is projected to be in consumer lines, as opposed to commercial lines, which are stagnating. In developed markets, he expects growth to come more from new products and innovation and the digitisation of certain products, for example in the cyber and healthcare spaces.

Showing resilience
Althoff acknowledges that it has been a challenging year for Hannover Re as a whole, because of COVID-19 and a number of cat event losses. Despite this, he notes, the company has again proved its resilience. It posted a net income of some €400 million after Q2 and a return on equity of close to 8 percent.

In the Asian region specifically, he said, this contributed positively to the result despite some specific losses such as wildfires in Australia. He said the company’s exposure to COVID-19 claims in the Asia-Pacific region was not that meaningful. Gunawan added that the severity of losses in South East Asia was lower than usual, boosting its performance.

But, Althoff said, rates were increasing on the back of the wider challenges the reinsurance market is facing. He said each regional renewal this year has brought rate increases stronger than the last—and he expects this to carry through to the year-end renewal and beyond.

He said this is not just because of COVID-19 but due to a confluence of factors that have been building for some time.

“This is the fourth year in a row when the industry will have not met its profitability target,” he said. “On top of that, you have ever-reducing interest rates, an economic recession, more cat losses, and COVID-19-losses come on top of that.

“As such, we are seeing strong rate increases. We also think the industry will move to clarify its exposure in new contracts to pandemics and things such as silent cyber.

“That is not to say the industry has no risk appetite for those, but it needs to take a different form to manage and steer systemic risks—likely that of a private-public partnership,” he concluded.