European lines diverge from global trends

Too much of the dialogue around market conditions disproportionally emphasises the challenges facing global and US property-catastrophe business, and ignores the very different dynamics in other market and product lines, Michael Pickel, member of the executive board of E+S Rück, the German-focused subsidiary of Hannover Re, told Baden-Baden Today.

The German market is influenced by a very different set of factors, he said, specifically high levels of losses in 2013, which are still having a notable influence on negotiations and pricing in the market, and a greater tendency to value and maintain long-term relationships.

“2013 was a pretty horrible year in terms of claims and many of those losses are still developing. That means there is an ongoing influence on loss-affected covers, which means that many renewals will be pretty stable,” Pickel said.

He said this dynamic in Germany is in sharp contrast with the situation in the US where a lengthy claims-free period has meant intense downward pressure on rates leading to some considerable decreases—a trend reflective of the more volatile nature of that market generally.

“You do see much steeper declines in the US market followed by sharper increases,” he said. “This is not the case in Germany where such changes are much more muted and often phased in over several years.”

He notes that the overemphasis on property-catastrophe business in much market commentary is also misleading, given some large reinsurers’ relatively low exposure to this sector. This business represents only around 5 percent of E+S Rück’s book and no more than 10 percent of Hannover Re’s total book.

“All the headlines focus on this one part of the market but we have much greater exposures in other lines such as casualty, motor, workers’ compensation, life and other sectors,” Pickel said. “Such generalisations based on the dynamics affecting property-cat lines only are thus relatively superficial to us.”

He said most lines of business in the Germany market are “pretty healthy” with the exception of fire-industrial, which is seeing decreases in rates but also high levels of claims.

In the parts of the market where E+S Rück mainly operates, working with mid-sized insurers and mutuals, he is not seeing the same high levels of competition for business that exist around the bigger accounts. These clients seek continuity above all else, he said.

Some have restructured elements of their reinsurance protection in recent years—but for different reasons. Since 2010, many insurers’ balance sheets have been strengthened significantly by a combination of unrealised gains and healthy reserves from previous underwriting years.

“This has allowed many insurers to reconsider the amount of reinsurance they buy and some have increased retentions,” he said. “But for the most part, this process has already happened—often two years ago. Very few are now willing to change their programme again as they don’t want any alterations to their capital models ahead of the implementation of Solvency II.”

Pickel also confirmed another theme of the Baden-Baden event this week: an increased interest from cedants in aggregate covers. He said the large number of medium-sized losses in 2013 has been the main driving factor behind this line of enquiry.