Hannover Re’s Henchoz: European market stabilising by rate hardening

Covid-19 is set to fuel pricing momentum in Europe at the upcoming 1.1 renewal despite the region being spared from large natural catastrophe events, but there are some lines that need more firming, Jean-Jacques Henchoz told The Insurer.

The Hannover Re chief executive is the latest senior industry executive to feature on The Insurer’s The Best Policy podcast.

According to Henchoz, the market in Europe has “stabilised”.

Talking about upcoming renewal discussions, he said: “The new point which comes into the discussion is of course the Covid-19 pandemic, which will likely have an impact on some business lines in Europe, particularly business interruption.  

“From that point of view, I think the price momentum will gain in 2021 and will also affect the European market, which is beginning to get rectified,” he added.  

The reinsurance industry has experienced years of margin erosion, which the market is keen to correct. 

In part down to the low nat cat loss event and part to do with the “ample capacity” in the market, prices have remained low and inadequate for some time. 

“It’s been a buyers’ market for a number of years and rates have declined for that period,” said Henchoz. “But we are seeing some catch-up.

“I think the interest rate environment is also a driver of change as it affects everyone and will need to be included in the equation as we price the business,” he added. 

However, outside of Europe, Henchoz stressed “that some of the lines need more firming”.  

He said: “If I take the high excess casualty lines or commercial auto, particularly in the US, the profitability is not yet there. Here, we would need to see some more firming of rates to make it interesting in the reinsurance sector.”  

Henchoz is cautious because of potential headwinds and further social inflation in casualty lines.

“Some of the lines are very, very tough. We see a delta between ideal price adequacy and what we see in the market,” he said.

Although Covid-19 is driving both positive and necessary rate increases in Europe and elsewhere around the world, the nature of this double-edged sword is that the associated challenges will be around for a long long time and the industry needs to be prepared for that. 

On how long it might take the industry to realise the true impact of Covid-19, Henchoz said it’s a “difficult question to answer.” 

He continued: “At this stage, we’re still in the middle of the crisis and we don’t see an end to it and there’s still this fear of a second wave in some countries. So, it’s very hard to say. If you take the numbers from the industry at Q2, you see a majority which is actually IBNR, so a lot of it is expected to incur over time but it’s booked as reserves. So, as of today we have huge uncertainty on the ultimate loss impact of Covid-19.”

Henchoz said a number of factors will drive the impact of how well the industry will ultimately understand the true cost of Covid, including the possibility of a second wave, further lockdowns and of course how long it will take to produce a globally accessible vaccine. 

“And last, but not least, I think legal uncertainty will take quite some time to be clarified. I think this is the case in BI. There will still be lots of discussions on the wordings and it will take months until we have full certainty around that,” he said. 

Indeed, BI has been the subject of much legal debate as wordings in particular are being heavily scrutinised both publicly and in law courts, with people calling for more transparency and clarity on business interruption wordings. 

“I think at this stage it is more important that we talk to our customers, and have an ongoing dialogue on understanding wordings. In most cases, we have a clear view on our limitations, but there are some areas, particularly in some European markets, where the wordings are not formulated for the case of a pandemic.  

“There’s a lot of interpretation and it’s important that we have an open dialogue with our business partners and try to clarify what was meant and where we have a remaining exposure. I think that’s the focus for now.”  

Going forward, Henchoz said it is important the industry clearly stresses that the risk of a global pandemic and a global lockdown scenario cannot be an insurable event, raising questions on the type of cover and solution the industry could provide.  

 “I think this will be done with the support of public institutions; we need a public/private sector partnership in that field. Discussions are going on as of today, but we need new solutions because the classical commercial insurance market cannot cope with such a massive scenario,” he said, citing France as a country which is moving forward with these conversations.