Hannover Re: picking the opportune moment

Before the summer started roasting Europe with dramatic heatwaves, Intelligent Insurer caught up with Michael Pickel, CEO of Hannover Re’s German reinsurance subsidiary E&S Rückversicherung, to hear his forecasts for the future of the re/insurance sector.

Known for being a major player in global reinsurance, with more than €19 billion worth of gross premiums, Hannover Re is the fourth largest reinsurance business in the world.

Even at a firm of this size there’s never any room for complacency, says Pickel, who was appointed to his current role in March 2019. He has been a member of Hannover Re’s executive board since 2000.
For E&S Rück, he says, the long-term challenge will be to make the most of the client base in Germany.

“This is a challenge because it is only one market and the companies here are well capitalised. This means it is certainly a challenge for reinsurance buying,” he explains.

However, he says: “In E&S Rück we have very good access to mutual companies because of our shareholder structure. Our shareholders consider us as their leading reinsurer in their programmes. So we have a certain stability.

“My view on the future role we should play in E&S Rück is to be more holistic.”

The teams that work on the German reinsurer’s life, P&C and the facultative business, have been aligned to enable them to work more closely together with clients to offer an overall service. “This is our future strategy for the German market,” he says.

Another priority identified by Pickel is building relationships with digital companies to be their preferred partner.

“In Germany we have very promising and interesting insurance labs. Berlin has a pronounced startup scene where you find many digital initiatives, and we have a plan laid out of ‘how to be a partner’ with topics to discuss with digital companies,” he explains.

One of these digital companies is Perseus, which operates in the space of small and medium-sized enterprise (SME) cyber business.

Perseus has been launched as a service to E+S Rück’s clients to offer help or training for SME companies on how to prevent cyber attacks. The reinsurer is also partnering with Finleap, a company builder in the fintech space.

More mergers
Speaking more broadly about the global reinsurance sector, Pickel agrees with the industry consensus that mergers and acquisitions (M&A) will be an ongoing trend.

“This trend is certainly part of the business and in my eyes it’s increasing. There are a lot more M&A, maybe they are in talks or at least companies are thinking about what they should be adding to their industrial lines book of business.

“Or they are thinking about whether they should buy speciality lines, carriers or whatever.”

More M&A is not a bad thing for a reinsurer like Hannover Re, he smiles. “In the first years of an M&A, the merged company tends to buy more reinsurance because the issue is to avoid volatility in the years to come. Therefore this global trend is not directly negative for my core business,” he says.

M&A is not the only trend that is forecast to be of benefit to the reinsurer. Lloyd’s of London’s withdrawal from certain markets, such as some specialty lines of business and segments of the business, particularly the casualty side and medical malpractice, as a result of internal restrictions, is another trend Pickel is watching.

He says: “It means an opportunity to offer additional reinsurance services, and that is part of the strategy: how to take advantage of certain situations that emerge. There are some businesses which you can evaluate and see whether there are possibilities.”

Identifying and making the most of opportunities as they arise is crucial for gaining an advantage in a broader reinsurance sector where pricing has been disappointing, he says.

“There’s too much available capital in the market that limits increases much more,” he stresses.

“If you look at the areas of claims, and the magnitude of major claims on our lists in 2017 and 2018, it’s certainly true that an on-average increase of rates, which is not in the double-digit area, is not what you would like after such dramatic years.”

More competition
Pickel seems optimistic, however. “The trend is improvement of rates, let’s put it that way, although growing competition in the market is putting pressure on the rates, which the company has had to work to mitigate.

“We manage this by not releasing or giving the whole capacity to the market, which we could do in an ideal world because we have fixed our risk appetite on a very low level. This is the one way to respond.”

The strategy is working, he says, highlighting Florida as an example.

“We are absolutely not a big writer for the Florida hurricane business, but this might change when the rates are really going up. At the moment, for example, we have only a very small line in this business.

“Or if you look on our cat excess of loss business, it stands at about 4 percent of our total P&C premium volume. That could change and could be a bigger number. It is the same for other areas where we see that there is too much competition.

“The other way to bypass competition is to leverage our capacity to give capacity to long-tail business. Collateralised markets or ILS investors want to have only pure cat business.

“Our thinking is we are looking for a relationship with a client on the whole placement, so we would like to make sure in our negotiations that we have equal access in casualty, property and cat business,” he explains.

With all this in mind, Pickel does think there will be more appropriate rate corrections this year.

“I’m quite positive insofar as we are talking about the aviation business. It was a shock what happened to Boeing and here we have seen on narrow markets really increasing rates. This is a contrast to prior years.

“We also have seen rate corrections on the Japanese loss-affected business, especially in property catastrophe business, therefore renewals were more pleasing than in previous years,” he says.

Future growth
As the market continues to evolve the reinsurance CEO sees potential growth in “lots of pockets” including insurtech, products and ILS. However, he is less convinced by what he sees as overstated predictions of cyber growth.

“We see growth in the cyber industry but I am not overenthusiastic about the growth numbers which are mostly produced by consultants.

“Cyber is a very strong area of our underwriting. At Hannover Re we have quite a sizable cyber book of around 260 million euros and we are partnering with digital ventures, which is a growing field for us as well,” Pickel says.

“In every business plan from a digital venture there is let’s say 100 million in sales after five years in whatever currency, but mostly they do not deliver this.

“Growth will come, but it’s not as pronounced as they think at the beginning when they are setting up the companies, and trying to get investors.”

He flags up more areas of growth for the company, including Hannover Re’s agriculture business which is developing parametric solutions.

The reinsurer has used both in-house development teams and insurtech partners to make this happen.

“We have a very strong centralised team in Hannover and we are proposing coverage forms for parametric risk in agriculture. We are writing some of them and we have partnered on weather risks with MSI GuaranteedWeather, a specialist parametric underwriting agency based in the US, to offer such products globally. So there are lots of areas where we are very active,” he says.

Pickel concludes by saying that the main challenge for Hannover Re as a business is to make sure nobody becomes complacent.

“You can be proud about what you have achieved in the past but you must be fit enough to be active in the future as well. Listening to clients’ needs is the first priority, and the essential parts of our culture, for example disciplined costs and underwriting, are the ingredients for being in good shape for the future,” he says.