ILS demand & reinsurance rate stabilisation expected: Hannover Re

Global reinsurance giant Hannover Re expects the demand for insurance-linked securities (ILS) structures to grow in the coming years, and that reinsurance prices will show greater stability at January 1^st 2017.

Germany’s Hannover Re has said that a lack of high-yielding alternative investments has seen the flow of ILS capital continue to enter the global reinsurance market, contributing to the ongoing supply/demand imbalance in the space.

During the 60^th annual meeting of the reinsurance industry at the 2016 Monte Carlo Rendez-vous, the reinsurer said that it expects the flow of expanding ILS capital and features to continue, citing an expectation of increased demand for the asset class in the coming years.

“Hannover Re accesses the ILS market both to obtain protection for its own catastrophe risks and to transfer its clients’ insurance risks to the capital market. The latter primarily takes the form of collateralised reinsurance, supplemented by the issuance of catastrophe bonds. Hannover Re expects demand in this area to show moderate growth over the coming years.

“The company is also itself an investor in catastrophe bonds, thereby ensuring that it can maximise all the opportunities offered by the ILS market,” said the reinsurer.

Growth of the ILS space has slowed in more recent times, especially when compared to the record breaking levels witnessed in 2014 and also in some more recent quarters, all of which is highlighted in the Artemis Deal Directory and the Artemis Catastrophe Bond & ILS Market Reports.

While the company expects an increased demand for ILS structures in the coming years, it also said that it “anticipates greater price stability in the treaty renewals as at 1 January 2017.”

“It is evident that reinsurers strive to prevent any further drop in the price level. This was already reflected in a considerably more muted price decline for the renewals in the first half of 2016. What is crucial for us in this situation is to only write business that satisfies our margin requirements, even if this leads to lower premium income,” said Hannover Re’s Chief Executive Officer (CEO), Ulrich Wallin.

Rates have been falling for some time now as the softening landscape has been exacerbated by the flow of alternative reinsurance capital, the benign loss experience, low interest rates, and intense competition, and it appears reinsurers have had enough of falling prices.

But beyond an effort to mitigate rate declines and the growing pressures on returns, Hannover Re states that greater price stability at 1/1 2017 will also be down to the “sharply increased burden of attritional losses.”

“Opportunities are available here for rate increases, for example in Germany and Canada, following the heavy losses incurred in some instances as a consequence of natural catastrophe events.

“The progressing digitisation also offers new opportunities for the insurance industry. With an eye to the rising risk potential, Hannover Re expects further growth in demand for products designed to protect against cyber risks, not only in the United States but also in other markets,” explains the reinsurer.

There’s clearly only so far reinsurers will go, but noise from the industry suggests that rates still have the ability to fall further. At the same time, an increase in demand for ILS could further pressure the marketplace should an insufficient amount of capital fail to be removed, although those reinsurers that utilize its benefits and look to work with it, stand to reap the rewards of efficient, diversifying capital that supplements traditional cover.

Read all of Artemis’ Monte Carlo Rendez-vous coverage here.