Overall, there has been little change in the situation in worldwide property and casualty reinsurance compared to the previous year. The significant competition in the markets has been sustained. It remains the case that the supply of reinsurance capacity far outstrips supply. These factors were once again instrumental in shaping the treaty renewals as at 1 January 2017, the date when 64% of our property and casualty reinsurance portfolio (excluding facultative business and structured reinsurance) was renegotiated. We were satisfied with the outcome on the whole, even though the anticipated rate stability has not yet set in across the board. A further contributory factor here was the continued absence of market-changing large losses in the year under review. Nevertheless, 2016 did see increased loss activity compared to the previous year, with positive implications for prices at least on a local level. All in all, though, the state of the international property and casualty reinsurance markets remains challenging.
Based on our excellent ratings, our long-standing customer relationships and our profit-oriented underwriting policy, we are well placed to handle the soft market conditions. Hannover Re continues to practise its systematic cycle management combined with rigorous underwriting discipline and our company trusts in a broadly diversified portfolio of high-quality existing business, complemented by opportunities that may arise in niche and specialty lines. The treaty renewals as at 1 January 2017 presented a range of attractive opportunities to expand the portfolio, above all in North America, in credit and surety business and in the area of cyber covers. We also enjoyed a surge in demand for reinsurance solutions designed to provide solvency relief, hence enabling us to book strong premium growth in Europe as well as in North and Latin America.
Expectations for the development of individual markets and lines of property and casualty reinsurance are described in greater detail below, broken down into the areas of Board responsibility.
|Property & Casualty reinsurance: Forecast development for 2017
|Specialty lines worldwide
|Credit, surety and political risks
|UK, Ireland, London market and direct business
|Worldwide treaty reinsurance3
|Catastrophe XL (Cat XL)
|Structured reinsurance and insurance-linked securities
|1 In EUR
2 ++ = significantly above the cost of capital
+ = above the cost of capital
+ / – = on a par with the cost of capital
– = below the cost of capital
3 All lines with the exception of those reported separately
In North America we expect to see further mergers and acquisitions in the current year, both in the insurance and reinsurance market. We do not, however, anticipate any adverse repercussions on our market position. Thanks to our long-standing, close customer relationships and financial strength, we even expect to tap into greater opportunities as a result. It is our expectation that in 2017 we will be able to further profitably enlarge our portfolio. Our focus here will be on existing client accounts.
In view of the heightened sensitivity that now exists in the market towards potential loss events, demand for cyber covers is likely to continue growing.
Although it remains competitive, the North American primary insurance market has proven to be rather stable; for the most part, therefore, we were similarly highly satisfied with the outcome of the treaty renewals as at 1 January 2017. The destructive forest fires of the previous year in Canada led to appreciable rate increases for loss-impacted programmes. Yet even for treaties that had been spared losses it proved possible to push through moderate price increases. The rate level for hurricane-exposed business in the United States was stable or slightly higher.
All in all, we expect to be able to profitably expand our portfolio in North America. In the treaty renewals as at 1 January the premium volume rose by 6.5% on an underwriting-year basis. As things currently stand, we expect to see sustained competition in this segment in the renewals as at 1 June and 1 July 2017 – the time of year when catastrophe XL covers, in particular, are renegotiated. On the whole, our North American business is nevertheless expected to deliver a slightly higher premium volume in the current financial year.
In Germany , the largest single market within our Continental Europe segment, we were able to assert our prominent position in the treaty renewals. Yet here, too, competition is fierce. On the whole, though, reinsurance rates remained stable. Although improved conditions were obtained in industrial fire insurance – which had recorded heavy losses –, these are still not adequate. We were therefore selective in our acceptances here. In motor business, our most important single line, we expect to further grow our premium income.
When it comes to covers for cyber risks and natural hazards risks, we expect to see rising demand – not least on account of the increased concentration of these risks, which are also insured against so-called extended natural hazards.
The premium volume for our domestic market is expected to remain broadly unchanged in 2017.
In the other markets of Continental Europe the picture was a mixed one: The treaty renewals in the Netherlands and Northern European countries passed off very successfully and we were able to expand our portfolios. Business in Central and Eastern Europe, on the other hand, proved to be highly competitive in the treaty renewals as at 1 January 2017, with rates coming under sustained pressure. Nevertheless, we also obtained higher prices in some markets, including for example in Poland.
For Continental Europe as a whole we expect to book a modestly lower premium volume.
In marine reinsurance we expect the pace of rate reductions to slow in the 2017 financial year; this was already evident in the treaty renewals as at 1 January 2017. Even over the medium term, however, the market environment for our ceding companies is unlikely to change. The losses recorded in recent years have significantly eaten into reinsurers’ margins and lent added impetus towards a bottoming out in prices. In view of the fact that our customers have also seen a contraction in premium income, we anticipate a reduced premium volume in 2017.
Aviation reinsurance is experiencing a considerable excess supply of insurance capacity. Against this backdrop, market rates fell by up to 10 percent in the treaty renewals. While we moved to scale back our proportional acceptances, in particular, non-proportional business – in which the price erosion was more moderate – remained stable. We do not expect any positive effects for the rate trend to make themselves felt in the 2017 financial year. With this in mind, we shall continue to write our business highly selectively and expect to book a reduced premium volume for our portfolio.
The slowdown in economic growth and the moderate rise in loss ratios in emerging markets will impact our business. While the risk appetite of primary insurers has increased steadily in recent years, we now expect modestly higher reinsurance cessions on account of the more demanding capital requirements associated with Solvency II. Although conditions will still be under pressure in the current 2017 financial year, it will likely only be slight. For this reason, we anticipate an expanding premium volume and an improved profit contribution.
In general terms, we are looking at declining reinsurance rates for 2017 – especially in the property lines – on account of sustained competition. In addition, we anticipate a further deterioration in conditions on the primary insurance side. In UK non-proportional motor business, however, we are benefiting from stable rates and growth in the underlying business. We are also expecting to tap into opportunities for new business, especially from the new start-up syndicates at Lloyd’s. Further risk selection and increased diversification should serve to boost the portfolio quality of our direct business, which is again expected to deliver stable earnings in 2017. In the treaty renewals as at 1 January 2017 we largely preserved our portfolio thanks to our established customer relationships. For the current year we expect to book a slightly higher premium volume because we have acted on various market opportunities, for example in cyber business.
In facultative reinsurance we have focused even more heavily on our core business. Agency business and primary insurance activities were reallocated within the Hannover Re Group. This realignment enables us to cater even better to our customers’ changing facultative reinsurance needs. This also includes a stronger orientation towards regional entities, which enables us to be even more attentive to the requirements of our customers. With this in mind, we anticipate new business potential and continued growth in the coming years. The investments that we have made in recent years in the areas of cyber risks and renewables will also lead to attractive premium growth in the future.
For the current financial year we anticipate a stable premium volume and sustained good results in our specialty lines. In this context we expect to be able to offset declining premium with new business.
Insurance markets in the Asia-Pacific region look set to stay on their growth track in 2017. Thanks to the establishment of a branch in India and the superb regional positioning of our other locations in Asia and Australia, we should continue to be able to act on opportunities for profitable growth.
Profits and the quality of conditions for reinsurers in Japanese business are particularly dependent on the development of natural catastrophe events. We expect our Japanese liability portfolio to show considerable improvement in the current financial year.
As far as the development of our reinsurance business in China is concerned, it is our expectation that over the medium term ceding companies will not focus exclusively on their growth targets, but will also pay significantly greater attention to profitability.
This will require improved risk management, actuarial pricing and the expansion of the existing portfolio into new business fields. Hannover Re will focus more heavily on achieving its margins and hence on cyclical underwriting and it will drive forward the diversification of its existing portfolio.
The region of South and Southeast Asia should deliver continued growth, albeit at a slightly slower pace than in the previous year. Our branch in Malaysia is pressing ahead with the expansion of its niche business, with the resulting premium expected to more than make up for possible reductions in the existing portfolio.
Australia and New Zealand remain challenging markets. By further stepping up our contacts with strategic target customers, we are nevertheless able to position ourselves successfully in the competitive environment and generate further growth opportunities. Our basic premise continues to be adherence to a strictly profit-oriented underwriting policy while at the same time boosting gross premium income.
All in all, we expect to see significant growth in reinsurance treaties that cover specific needs of our customers and are only placed with selected reinsurers such as Hannover Re.
In South Africa the risk-based solvency regime SAM (Solvency Assessment and Management) will be adopted for the insurance industry in the course of 2017. We anticipate a stable premium trend for our reinsurance portfolio and specialty business in the current year.
The market and the placement of reinsurance cessions are just as fiercely competitive in Latin America as they are in other regions. Based on our exceptionally good market position and our outstanding financial strength, we expect prices in the main renewals as at 1 July 2017 to come under less pressure in view of natural catastrophe events recorded in 2016 such as the earthquake in Ecuador and Hurricane Matthew. Despite the challenging state of the market, we were able to keep our portfolio stable thanks to our focus on Latin America as a whole. In Argentina – one of the largest markets in Latin America – we expect to see a continued business-friendly policy. A similar tendency is also likely in Brazil. To this extent, we are confident of generating further profitable growth for our portfolio from Latin American markets in the current financial year by pursuing our selective underwriting policy.
Hannover Re expects demand for the coverage of agricultural risks to continue rising: the increasing need for agricultural commodities and foodstuffs as well as the growing prevalence of extreme weather events are generating stronger demand for reinsurance covers, particularly in emerging and developing markets. At Hannover Re we engage both in traditional reinsurance and in intensified cooperation with our customers and partners on the development of new original insurance tools. In this regard, we see further growth potential for index-linked products as part of direct and indirect insurance concepts in emerging and developing economies. Owing to the discontinuation of a small number of large treaties, however, we expect premium income to contract in 2017.
Rates in our retakaful business are likely to remain stable or decline in the current financial year. New business opportunities should open up in niche areas such as motor insurance riders or in credit and surety business. Overall, the premium volume generated should be on a par with the previous year.
Although the inflow of capacity from capital markets into natural catastrophe business has slowed appreciably, the market is still overshadowed by an oversupply of reinsurance capacity. The current soft market phase will only come to an end when the majority of market players reach a level of profitability that is insufficient – whether through high loss expenditures, inadequate reserving levels or influencing effects from the capital market. Price reductions recorded in the 1 January 2017 treaty renewals were offset by increased shares in profitable programmes, with the result that premium growth of 2.9 percent was booked for the renewed portfolio. Premium income is expected to remain stable for the full year.
Owing to the implementation of risk-based models for calculating solvency requirements not only within but also outside the European Union, demand for structured reinsurance has surged sharply higher. The key driver here continues to be the growing integration of reinsurance into insurers’ risk management as a means of offsetting the increasingly exacting capital requirements placed upon them. In addition, the increasing pressure on the profit margins of our customers around the world is creating a greater need for tailor-made reinsurance solutions that can optimise the costs of reinsurance. For the current year we are expecting a substantial increase in premium.
In the area of insurance-linked securities (ILS) we expect to see steadily growing demand. Investors are seeking a negative or minimal correlation with other financial investments and hence the diversification that this brings. What is more, the market for insurance risks is perceived by investors as relatively attractive compared to other investments. We are responding to this market situation with a strong emphasis on service, offering individually tailored products – from collateralised reinsurance to catastrophe bonds – for property and life reinsurance risks. Over the coming years we expect our ILS activities to deliver a positive and consistently rising profit contribution.