13 November 2017 Insurance

Without regulatory pressure reinsurance comes down to price

In the absence of regulatory or rating pressure, the decision to buy reinsurance “boils down to the price and not security” in Latin America.

That is according to Martin Heinz, managing director for Central and South America at Hannover Re, who explained that over the last several years, this has led to “unsustainable reinsurance pricing and therefore makes some markets unattractive for reinsurers like us that would like to maintain a AA-rating”.

As a consequence, Heinz has seen cases where insurers were unable to recover their claims from “cheap” reinsurers, leading to severe financial strain.

Over the last 18 months, the region has been hit with numerous cat events: earthquakes in Ecuador and Mexico, devastating floods in Peru, forest fires in Chile and several hurricanes affecting the Caribbean and the US.

“We have to take stock now and analyse whether we can continue as before. Of course, we can’t,” said Heinz.

The plan: talk to Hannover Re’s clients and explain to them that the reinsurer is there to pay losses, but that it can only make that promise at technically correct pricing.

“Since prices have dropped considerably over the last five years, it is fair to say that we need to bring terms back up to levels where we can pay the next claim. We hope our clients understand that, because otherwise it makes little sense for us to pay out more than we take in.”

Hannover Re’s aim is never to retreat from any market, but this isn’t easy. The reinsurer will stay in the market, but not with full capacity and only with clients that understand that reinsurance has to be mutually profitable.

“In general, we would like to see more possibilities to diversify away from property reinsurance, which dominates in most countries, and into liability, accident and other non-correlated lines,” said Heinz.

The previous absence of catastrophes has allowed reinsurers to post good results, but this year, income and capital will be affected by massive losses.

“Add to that shrinking reserve buffers, and we can see that the reinsurance market softening has bottomed out; instead in many areas we will see hardening of conditions,” he said.

“The losses coming out of Mexico, Ecuador, Peru, Chile and the Caribbean will have consumed a big part of the profits of the last five to 10 years, and we need to start saving for a rainy day again.”

On alternative capital, Heinz explained that in Latin America, it mainly takes the form of capital providers for traditional reinsurance companies, “normally in opportunistic situations”.

“It has its role in the few cat bonds that are placed in Latin America. The alternative capital comes when it is needed, and therefore fulfils an important function.”

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