NEWS
Unfinished business in property; casualty needs attention
Hannover Re will be seeking incremental improvements to its North American book.
Hannover Re heads towards the 1/1 renewals with an eye on sweeping up bits of unfinished business in US property while digging deeper into issues in the increasingly concerning casualty segment, Axel Freiboth, Hannover Re’s managing director & chief underwriting officer for treaty reinsurance in North America, told APCIA Today.
Neither of those things should mean significant change for the German reinsurer, however. Its approach is more subtle and nuanced—seeking incremental improvements as opposed to major changes in the Hannover Re North American book.
“In our ideal world, it will be a continuation of where we are currently,” Freiboth said of the book he hopes to finish with as of January 1, 2024
There is some need to address unfinished business on property, he acknowledges. He will be looking for tweaks in some cases on programmes, meaning “slightly higher retentions and more adequately priced risks”.
“We expect a little more shift from proportional covers towards non-proportional,” he suggested.
In contrast to the 2023 reset, described by many as the most challenging and dislocated renewal for decades, 2024 may be more the year of the fine-toothed comb. Freiboth said he is looking at “individual companies, their needs and their experience” as the new market post-reset allows reinsurers to take cues from cedant priorities.
“It is about supporting our clients—understanding how they see their portfolios,” he said.
“In US property specifically the issues driving the 2023 market reset have been partially addressed, but the work set out one year ago is not quite done yet.
“Some slight adjustments are still required to treaties, which could mean rate increases, but it could also potentially mean a few more retention increases as well.”
The hike in retentions in 2023 that pulled reinsurers away from frequency losses left Hannover Re “comfortable” overall, but still behind the curve—below the frequency bar, in select cases where “we really couldn’t make that big bold move in one step”, said Freiboth.
Heightened inflation has not yet undermined the overall retention hikes achieved in 2023, he said, but he highlighted the double-edged sword of current economic conditions. Higher interest rates mean that reinsurers are earning more on the investment side, so moving retentions again is less of a concern if one considers the boost given to earnings by higher interest rates, he explained.
“Some slight adjustments are still required to treaties, which could mean rate increases.”
Axel Freiboth, Hannover Re
Exposure to perils
The question of named perils or modelled vs. unmodelled or secondary perils remains part of Hannover Re’s “unfinished business” from 2023.
“A calmer market should create time to catch up on the details behind frequency and severity trends,” Freiboth said. US insurers have grappled with their exposure to a number of secondary perils in recent years including wildfires, floods and severe convective storms—all of which are causing meaningful losses on a regular basis.
“We need to look into the details,” Freiboth said. “With higher frequency and severity of events, it is upon us to really look at why that is.”
Solutions may not always be simple, he admits. It may be that reinsurers must sift out the impact of demographics and population/construction density and insured values compared with the frequency of losses and the comparative impact of event intensity and severity.
Untangling these forces could merit a deep dive in treaties as Hannover Re seeks out “the right price for the risk ceded”.
“It’s not so easy just to say ‘let’s increase rates by X percent and then retentions by Y’,” Freiboth said of the 2024 project. “We need to look at cedants on an individual basis and adjust things accordingly; there’s no one size that fits all.”
Casualty to the fore
If the job required in the property portfolio is rooted in the detail, the work required in casualty might involve some more fundamental changes. Perhaps due in part to the turbulence in the property books, casualty has been, relatively speaking, less of a priority for reinsurers in recent renewals.
That could now be about to change. “This year’s casualty treaty renewals are likely to be more challenging than property this year,” Freiboth said.
“The industry may have lost track of the normal progression of liability claims.”
“In 2023 we were extremely focused on correcting the portfolio on the property side and lost focus on the liability line of business.”
Many drivers suggest this renewed focus is required. These include ongoing inflation, social inflation, litigation financing, and potential claims from per- and polyfluoroalkyl substances (PFAS), claimed by some to represent the next asbestos, opioids and others, the Hannover Re executive warned.
Very few of these drivers are easy to get a handle on, however. Any number of them might still be too vague to quantify with certainty, for current loss trends and for reserve development, Freiboth suggested.
One example of this can be found when looking at post-COVID-19 pandemic court and civil damages trends. “In this realm, the picture is still a little fuzzy and the industry may have lost track of the normal progression of liability claims,” Freiboth admitted.
On casualty at least, the interests of insurers and reinsurers are more aligned. The bigger part of this market is quota share business, where fortunes are largely shared. Insurers too understand the risks.
As such, the relative strength in financial performance to date for primary casualty carriers may not be a sign of perfect health—if casualty develops along the more negative end of projections. “Many cedants sound as concerned as their reinsurance providers,” Freiboth said talks to date.
Here again, work towards the 1/1 renewal is a deep dive by Hannover Re that will take place cedant by cedant, with fixes often requiring painstaking work on policy wordings.
“We need to understand what our clients are doing with respect to their own portfolios and their reserve setting,” Freiboth concluded.
Main image: Shutterstock / DaLiu
