Hannover Re expects significant P&C rate increases, record highs for ILS

German reinsurance company Hannover Re is forecasting significant rate increases across property and casualty reinsurance and the expectation of “new record highs” in insurance-linked securities (ILS) over the medium term.

Hannover Re gave its view on the market this morning, in place of the cancelled Monte Carlo Rendez-vous.

The reinsurance company is expecting broad rate hardening across P&C reinsurance lines and regions, with even the notoriously softened by major reinsurers European region expected to see “material hardening” in natural catastrophe lines.

It’s a particularly bullish outlook from the company, which joins the prognostication of the other major reinsurance, all of which have called for significant firming ahead.

Hannover Re notes the strain placed on insurers and reinsurers by the low-interest rate environment, large losses suffered and the Covid-19 pandemic, which it expects will promote the continued need for more rate.

In addition, the reinsurer sees rising demand for reinsurance from an industry that is financially robust.

As a result, the market environment supports an “already discernible trend reversal towards higher prices,” Hannover Re explained this morning.

Leading it to expect “profitable growth opportunities across a broad front.”

Driving this is the breadth and scale of rate hardening, with the reinsurer forecasting “significant price increases spanning the various lines of property and casualty reinsurance in the treaty renewals as at 1 January 2021.”

“Our sympathies go out to everyone who has lost family or friends or been impacted by the virus in any other way,” Jean-Jacques Henchoz, Chief Executive Officer of Hannover Re, commented this morning. “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.”

On top of rates and demand, Hannover Re is also seeing increasing demand for solvency relief solutions, somewhere a company of its scale, capital and rating feels well-suited to play.

The company notes that it has achieved rate at reinsurance renewals so far this year, as well as improved terms and conditions.

But this isn’t enough yet and Hannover Re said, “These are not always technically adequate and further price increases are therefore needed.”

The company expects better rates across many parts of the market in Europe, in particular in the Lloyd’s market, while insurance rates are moving positively in Germany, France and other regions, which should help to drive reinsurance rates higher too.

In North America, “appreciable price increases” are becoming the norm across both property and liability lines, while the impacts of severe weather and catastrophes are also driving pricing there as well.

Hannover Re cites sustained appetite for protection in Latin America and rising demand for protection, while in Asia Pacific, while rate movements may be less significant and more localised the company is positive on growth and renewal opportunities.

Natural catastrophe reinsurance is where the expectation for the highest rate increases are though, with Hannover Re citing an “overall favourable trading environment for reinsurers throughout all renewals in 2020 so far.”

Into 2021 Hannover Re expects property catastrophe reinsurance will continue to improve, in terms of rates and what is covered.

In North America the reinsurer says that “Overall, rates for US property catastrophe business have reached a satisfactory level,” but it expects to see “continued upward pressure on rates, particularly for loss-impacted programmes.”

In Europe, thanks in part to the impacts of the Covid-19 pandemic in the region, Hannover Re says “material hardening is expected for 2021” in natural catastrophe reinsurance business.

For Japan, which renews in April, Hannover Re forecasts “further substantial price increases in 2021” which it says “should help bring about technical adequacy, the fundamental basis for reinsurers’ long-term support for this market.”

Meanwhile, in Australia and New Zealand, Hannover Re expects the firming trend to also continue, with the trend of upward pressure to get to prices that are commensurate with the risks set to persist.

In insurance-linked securities (ILS), an area of the market largely focused on property catastrophe reinsurance and retrocession risks, Hannover Re expects ILS to follow-suit, benefiting from rate rises broadly as well.

“Just as in the reinsurance market, conditions are improving and new record highs can be expected in the medium term,” the reinsurer explained on ILS market expectations.

The reinsurer noted the decline in ILS capital that will help to drive this, but as a user of ILS capital, in its retro programme and a facilitator of transactions through its collateralised reinsurance fronting and support it provides cedants on catastrophe bond issues, Hannover Re appears bullish on the potential for the ILS market over the coming year.

“In 2020, for example, Hannover Re has so far brought five catastrophe bonds to the capital market for US clients with a total volume of around USD 1.2 billion. Over the coming years the company expects demand to show moderate growth overall,” the reinsurer explained.

Overall, Hannover Re concludes, “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, said. “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 expects the rate momentum seen so far this year will be sustained at January 2021’s round of renewals, with “sharply rising prices” and “appreciable improvements in conditions” both anticipated.

“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,” CEO Jean-Jacques 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.”