German reinsurer Hannover Re recently held a conference call to discuss its progress during 2012 and at the important market juncture of the January reinsurance renewals. The reinsurer said that despite the reinsurance market environment being considerably more competitive than in the previous year, citing increased capacity from new reinsurers and the insurance-linked securities space, it managed to achieve a slight overall increase in pricing through careful deployment of capital.
One of the factors that has increased competition it said was a noticeable increase in the flexibility among some alternative reinsurance capital providers in the convergence and ILS space. Jürgen Gräber, a member of the board at Hannover Re with a focus on non-life business, commented on the call that Hannover Re has noticed an increased appetite for investing money into the reinsurance field and the ILS space. He said that they estimate the contribution of this alternative capital to the reinsurance market as around $40 billion in size from sidecars, ILS structures and insurance-linked securities funds.
Gräber explained that most of this capital goes to high rate-on-line reinsurance business, or to perils and regions which are low-frequency segments of the reinsurance market, so in competitive terms it does not compete with Hannover Re’s day-to-day reinsurance business with mutuals and insurance companies. But he later stressed that its influence was felt.
Gräber said that normally this type of alternative reinsurance capacity has been relatively inflexible and wants a certain rate of return on its investment in the sector. However, citing his belief that there is clearly an oversupply of capital he said that at the recent January renewals Hannover Re could sense that some capital providers were keen to offer capacity at eased prices and with some flexibility observed.
This is the trend we have been seeing as the ILS and reinsurance-linked investment space matures and expands. Capital providers are keen to acquire business and the recent renewals certainly saw a more flexible approach to underwriting, particularly from some of the larger players in the ILS and reinsurance fund space. Of course some of this increased flexibility on terms and pricing could also have been sparked by a lack of opportunities in the catastrophe bond market leaving investors keen to deploy capacity.
Gräber continued to say that the new sources of reinsurance capital make an important contribution to the market, and that this capacity from alternative sources is needed in the peak risk zones such as Florida, but has a tendency to avoid the peak of the hard market. CEO of Hannover Re, Ulrich Wallin later commented that Florida is a key spot in the reinsurance market and tends to attract ILS and alternative capital, but that given the supply of capital he would not be surprised to see Florida rates come under pressure at the mid-year renewals.