Hannover Re: Reinsurers are underestimating political risks
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Hannover Re: Reinsurers are underestimating political risks

jean-jacques-henchoz updated 2023.jpg

A hard property cat market isn’t just headline news for the reinsurance market these days: the rising costs of cover are becoming political issues in cat-exposed spots such as Florida and California, and more widely.

The dynamic partly highlights the value that reinsurance companies bring to the global economy, Hannover Re chairman and CEO Jean-Jacques Henchoz says. “Reinsurers draw attention to the price of risk,” he notes, sending signals to insurers that they must charge adequate rates at the primary levels.

But as the affordability of insurance becomes a politicised issue, reinsurers must be attentive in turn to how the pricing signals they are sending are handled.

“The corollary is that we cannot be alone in tackling climate change,” he says. “My plea is that politicians, governments, international institutions … pay more attention to the need for climate change adaptation.”

A task that has become essential to climate change response is prevention: making sure building codes are in place, infrastructure is resilient and development in hazard-prone areas is avoided.

These preventive actions, in turn, will motivate (re)insurers to adjust the price of risk. But “the political debate today is not recognising this”, Henchoz says, because it’s easier to “target the insurance industry when prices are too high”.

Of course, there are roles the reinsurance industry can play and Henchoz says carriers must be self-critical and cannot simply respond to risk through exclusions.

Instead, the industry can stay relevant by finding new ways to access and structure risks to help narrow the protection gap.

But amid this politicisation of the rising price of coverage, the Hannover Re CEO argues that reinsurers are underestimating political risks in general, despite the recent lesson of Covid-19 on the kind of pressure that can be brought to bear on carriers.

There is a societal view, he adds, where (re)insurers are perceived to “have a societal role to play in paying claims, even if they are not legitimate from a legal point of view”.

“I think the industry needs to recognise that there is an element of political risk in everything we do.”

The industry needs to recognise that there is an element of political risk in everything we do

One example is the steady increase of trade barriers facing reinsurers – one that jeopardises the notion of pooling capital to pay for significant losses.

As of April, more than 27 countries had restrictions to freely conduct business on a cross-border basis, thus limiting the capacity of global reinsurers to spread risk globally and to prevent domestic concentrations of risk, according to the Global Reinsurance Forum.

Such limitations increase the cost of doing business, Henchoz says, which in turn contributes into a “strange situation” where political and regulatory development makes risk-taking more costly, while society says risk-takers are charging too much money.

Managing volatility

Henchoz describes the 2023 market as part of a “logical reaction” to many years of losses for the reinsurance industry.

“We're in a phase where the supply demand equation has changed radically in 2023,” he says. “If now is not the time to make the necessary adjustments, when will the time be, is the question I’m asking myself.”

In that sense, the messaging for the remainder of this year will “not see any changes”, the chairman stresses, as carriers are still taking huge risks in a highly volatile environment.

“We cannot possibly have the reinsurance industry producing 5% [returns],” he says. “I think the market acknowledges that – even if it's difficult to accept in practice on a single renewal basis.”

In his words, Hannover Re is in the business of managing volatility but is not aiming to deliver volatile results. The days when there was a “gentleman’s agreement” granting reinsurers several years of payback to recover after major cat losses is long gone.

Maintaining that balance is a challenge, he admits, but he points to some key factors that have helped Hannover Re to mitigate the impact of the post-2017 volatility on its net results.

These are its relatively high use of retrocession capital, cautious reserving strategies and its pursuit of the “best possible diversification”.

The latter requires discipline in hard markets, Henchoz notes, as carriers must be careful not to chase outsized growth in pockets of rate growth.

Somewhat different

More than four years into the job, CEO Henchoz expresses confidence in seeing Hannover Re’s tagline of 50+ years – the “somewhat different” reinsurer – put into everyday practice among his employees.

To realise this identity, a few years ago the firm summarised its internal key values around three points: (1) responsibility, and giving underwriters ownership of the profitability of their book, (2) the “we spirit”, meaning a partnership approach in client dealings, and (3) drive and an entrepreneurial mindset.

“Of course, we have different views on terms – there’s always negotiations but whatever we do, we try to do it with a long-term perspective,” the executive adds. “We might be opportunistic on pieces of business, but we are not in a transactional game. We are in a partnership game.”

That qualitative aspect of the business is hard to quantify. But in terms of stock prices, Hannover Re has fared relatively well among its continental peers, showing a cumulative price increase of 13% since the start of 2020.

Fronting business

In terms of business profile, one aspect that differentiates Hannover Re from incumbents is its presence in the fronting space – which is going through a time of turmoil and controversy sparked by ILS InsurTech Vesttoo’s alleged use of fraudulent letters of credit (LOCs) as collateral.

As a reinsurer with significant equity, similar to Arch Re or Allianz Risk Transfer, the firm is somewhat apart from the US primary fronting companies, which often have lower equity and retain less risks.

To this end, Henchoz says he does not see the case posing fundamental challenges to the firm’s fronting business. There are lessons to be learnt in terms of the due diligence process, but the LOC issue is at the core of Vesttoo’s problem, not the ILS market (which more often uses cash collateral), he notes.

“In the end, this is not the business model which is in question – it’s just the governance and the controls which need to be looked at.”

On the contrary, the fronting industry is seeing a “flight to quality”, he adds, meaning companies will be looking for very secure partners. In his view, cases like Vesttoo’s can accelerate the company’s fronting growth.

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