Hannover Re is braced for significant price rises across all classes as the market is hit by a triple whammy of pandemic losses, catastrophe losses and low investment returns.
The reinsurer said the losses have also led to a flight to quality by insurers who were seeking greater security from their reinsurance carriers and warned that public-private partnerships will be needed to meet the challenges of future systemic risks.
“Along with generally stronger demand for high-quality reinsurance protection, primary insurers are increasingly seeking tailor-made solutions offering solvency relief,” said Hannover Re in a statement. “This is where first and foremost reinsurers with a particularly large risk-carrying capacity and above-average ratings have a pivotal role to play.”
On Covid Hannover CEO, Jean-Jacques Henchoz, (pic) said the pandemic had exacted a terrible cost both financially and on the lives of his colleagues and clients.
“Our sympathies go out to everyone who has lost family or friends or been impacted by the virus in any other way,” he, said. “We stand shoulder-to-shoulder with our customers and emphasise sustained, partnership-based relationships. Our business model and our capital resources are geared to managing extreme scenarios. Low interest rates are here to stay for a long time. This necessitates considerable pricing discipline, because technical profitability will have to do even more to offset declines in investment income. With this in mind, price increases on both the insurance and reinsurance side are absolutely essential in January and beyond.”
In the various rounds of renewals held during 2020 Hannover Re said it has secured improved conditions and price increases in some areas. Particularly for treaties that had suffered losses, price increases mostly running into double-digit percentages were obtained. Owing to the low level of interest rates, however, these are not always technically adequate and further price increases are therefore needed.
It added the effects of the Covid-19 pandemic on worldwide reinsurance markets vary in scale from region to region. The largest losses to date are anticipated from covers in the areas of business interruption, trade credit and event cancellation, although the spectrum of possible scenarios remains too broad for concrete forecasts. A further consideration is that many government assistance programmes are limited in duration. Against this backdrop, the level of risk awareness among primary insurers and hence the importance attached to high-quality risk protection have risen sharply over the past few months.
“For both insurers and reinsurers, 2020 remains dominated by the ongoing Covid-19 pandemic and the associated losses as well as by the sustained low interest rate environment and resulting impacts on profits,” added the statement. “In both the primary and the reinsurance market, therefore, technical profitability will move centre stage on a lasting basis – also with a view to preserving the industry’s future risk-bearing capacity. Against this backdrop, rate increases are absolutely essential.”
“From our perspective, Covid-19 is a market-changing event that can be compared with the terrorist attacks of 11 September 2001 or hurricanes Katrina, Rita and Wilma in 2005,” Sven Althoff, a member of Hannover Re’s Executive Board responsible for property and casualty reinsurance, commented. “The true scale of the losses caused by the pandemic will only become clear over the long term. We see the Covid-19 pandemic as a catalyst for fundamental adjustments to prices and conditions at insurers and reinsurers alike. Just how these manifest themselves will, however, vary by region and line of business.”
Hannover Re added it expects that the growing momentum of the price increases recorded in past rounds of treaty renewals will be sustained in the year ahead. Sharply rising prices across the various segments can be expected as at 1 January 2021. Appreciable improvements in conditions are similarly likely in view of the effects of the pandemic and the associated considerable uncertainties.
“The Covid-19 pandemic confronts us with a systemic, worldwide risk. Simply given its capital resources, the insurance industry alone cannot shoulder such an accumulation risk,” Mr Henchoz said. “Partnership-based approaches between governments and the insurance sector are needed to create promising solutions for the coverage of systemic risks such as cyber-attacks or pandemics. We are optimally placed to support the development and realisation of such coverage concepts and hence to ensure that a larger share of the costs resulting from future pandemics are covered at premiums commensurate with the risk.”
“In the second half of the year, a series of major loss events has occurred,” added the reinsurer. “The massive explosion in the port of the Lebanese capital Beirut at the beginning of August claimed numerous lives and caused severe devastation. Together with losses from natural catastrophes in the United States and Asia, large loss expenditure for the third quarter (excluding Covid-19) is therefore likely to remain at the anticipated level.”