Hannover Re prepares to grow its book as nat cat losses drive rates upwards

Lines of business hit by the natural catastrophe losses in the third quarter of 2017 could ultimately offer an opportunity for Hannover Re to grow its book of business, Michael Pickel, executive board member–property & casualty target markets, Hannover Re, told Baden-Baden Today.

He said that in the run up to the renewals, the reinsurer will first be assessing how primary rates respond to the losses. Where rates in this segment of the business harden, Hannover Re will look to ensure it also benefits.

“We will look at all affected loss areas and see whether the primary business will react; where the primary rates show some hardening we will take advantage of it,” Pickel said.

Total insured losses from the natural catastrophes including hurricanes Harvey, Irma and Maria could exceed $100 billion, according to estimates from the catastrophe modelling companies. And that is before the full extent of other losses, including the California wildfires, are taken into account.

Hannover Re issued a profit warning on the back of the US catastrophes. It expects losses will exceed its large loss budget because of them and this is likely to result in the company missing its targeted €1 billion ($1.18 billion) group net income in 2017.

But Pickel described the losses as potentially having a positive effect on the industry. He said the absence of large losses had driven rates to a point where they did not reflect the reality of catastrophe events such as those seen in the third quarter, he noted. “We are getting back to normality.”

He noted that the extent of the losses will have come as a surprise to many in the industry. The claims will be higher than many reinsurers will have budgeted for; higher than people would have expected based on modelled losses, Pickel said.

As a result, Hannover Re is expecting significant rate increases in P&C business. While this will be concentrated in the regions affected by the hurricanes in North America, the reinsurer also anticipates increases in other non-loss affected lines in the upcoming renewals.

Overall, the German reinsurer’s aim is to bring P&C rate levels back to 2015 levels, Hannover Re CEO Ulrich Wallin said during an October 19 investors’ day in Frankfurt. In some cases, this could mean very steep rate hikes.

“On some businesses, this would mean significant increases. Florida cat will probably need increases of 40 percent to 50 percent,” Wallin said.

Pickel told Baden-Baden Today that the reinsurer will seek rate hikes on lines where severe losses have occurred.

“We always try to recover in the areas where losses have occurred. Last year it was the Fort McMurray wildfire in Canada where we have increased rates and this will happen to the cat and property business in the US,” he said.

Hannover Re’s case will be helped in the US by the dynamics in the primary market where, Pickel believes, there was momentum towards rate hikes even before the hurricanes struck.

The primary market in the US is prepared to increase rates, he said. Before the hurricanes, primary property lines of business in the US showed too many attritional losses and the price increase was already visible. “The hurricane losses have just accelerated this trend,” Pickel noted.

At the very least, he believes, the heavy losses in the US will prevent any further rate decreases. The price changes in the affected regions will also have repercussions for other markets.

“Rate decreases even on claims-free programmes are no longer possible,” Pickel said.

“Our philosophy in the January renewals is not to accept any further rate decreases. Where this happens, we will certainly cut back and reduce our presence in those markets,” he explained.

It is now a case of the reinsurer carefully selecting the lines on which it is willing to increase capacity and seek growth. In the upcoming renewals, Hannover Re is most interested in the US property business, property per risk business or pro-rata business, and to a certain extent, cat business, Pickel said.

“We will watch to see whether there is a firming in rates in the casualty business and then potentially increase our exposure,” he concluded.

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