Hannover Re's top executive cites economic conditions and higher cost of capital for stricter terms, price hikes for its move out of U.S. property-catastrophe.

By CYRIL TUOHY, managing editor of Risk & Insurance®

Warning to reinsurance buyers: Hannover Re will not participate in June 1 and July 1 renewals if all you're looking to do is reinsure the U.S. property-catastrophe slice of your portfolio with the German-based reinsurance giant.


That was the message of Hannover Re Executive Board Chairman Wilhelm Zeller last week, during a conference call with reporters on the property-catastrophe reinsurance market.

"We will not reinsure buyers looking for property-catastrophe only," said Zeller. "We will reward buyers who reinsure the entire portfolio with us."

Hannover Re has 525 clients in the United States.

Though just "a handful" of Hannover's 525 U.S. clients look for property-catastrophe coverage only, these clients typically require the lion's share of the reinsurer's capacity, Zeller said, and that capacity will be allocated to those cedants that reinsure big chunks of their coverage portfolios with Hannover Re, not just their property-catastrophe exposures.

The reason for the blunt message was simple: The cost to Hannover Re to reinsure its risks in the retrocessional market has gone up, said Zeller. In addition, reinsuring U.S. property-catastrophe risk only, without the hedge offered by a diversified risk portfolio, has always been a money-losing proposition.

Reinsuring property-catastrophe risk in Europe and the rest of the world outside of the United States remains profitable, said Zeller.

SIMILAR TO 2006

He added that Hannover Re would impose rate increases on June and July renewals similar to levels buyers saw in 2006. In addition, Hannover Re will look to reinsure risks in regional and superregional coverage programs rather than risks in national programs.

If the reinsurer can't get what it believes to be a fair price to reinsure a client's property-catastrophe risk, Zeller said, then Hannover Re will consider investing in alternative reinsurance strategies such as catastrophe bonds and insurance-linked securities.

"If we can't get the rate in the traditional market, which we think we need then we will diversify capacity to insurance-linked securities," he said.

The company, which has set aside $200 million to invest in these types of securities, won't hesitate to increase its ILS budget, he said.

After five or six months of dormancy in the second half of 2008, the market for catastrophe bonds, a type of insurance-linked security, is showing signs of life, said Thomas Holzheu, senior economist for Swiss Re Economic Research & Consulting.

"The fact that we've seen three bond issues in the past two or three weeks shows some confidence is coming back," he said. "Some of the technical issues have been resolved, and the potential is there. Demand is there from sponsors to place some of the bonds, and there's dedicated capital that wants to invest in this space."




March 23, 2009

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