Hannover Re’s cat hub

“The market will turn when reinsurers start losing money. One big event could change the market, yes, but the question is for how long, given how much capital is on the sidelines. But no-one wants to invest in an industry that is losing money. In many ways it is that simple.”

That is how Konrad Rentrup, the chief executive of Hannover Re (Bermuda), characterises the dynamic in the market, speaking earlier in the summer and well before the start of what has turned out to be the most active hurricane season the market has seen in a long time.

Yet the logic, like the man saying it, is considered, pragmatic and makes sense. The industry can speculate all it likes about the consequences of a loss or, indeed, the ongoing negative effect low interest rates are having on investment returns. But little will change while the industry remains profitable.

In fact, parts of the industry’s profitability were creaking well before the hurricane season. Rentrup says that even in the first quarter results of some reinsurers the signs could be seen that their reserve releases were drying up.

“Some first quarter results did not look too healthy,” he says. “It was clear that some reinsurers had used up all the fat in their reserves and large losses could lead to negative results.”

Based on this logic, Rentrup does not believe the age-old cyclical nature of the market is dead. “Perhaps it is not as pronounced as in the past and I think primary companies look at reinsurance in a different way. They want more stable relationships.

“But pricing will still fluctuate and the profitability of the sector will drive that.”

He adds that other factors could influence this, including the possibility that interest rates will increase, making investment opportunities in other sectors more attractive for investors. “That could help the market maintain higher rates,” he says.

In terms of market conditions before the hurricane season, he says brokers were still putting some pressure on rates and terms and conditions although that pressure had decreased somewhat.

A decision to stay

Hannover Re (Bermuda) has been operating on the Island for some 16 years; it was founded by Rentrup in 2001 after he was asked to write a paper on the pros and cons of the German reinsurer forming a unit on Bermuda. That resulted in the Hannover Re Executive Board making the strategic decision top form the company in 2001. It received its licence as a class 4 reinsurer in Bermuda in April 2001.

“I was only planning to set it up and stay three years,” Rentrup says. “But the quality of life here is good and I am still here. It made sense for the company.

“Hannover Re had always been an active player on the cat side but it had no presence in the US. Bermuda was the natural place to form an operation—many of those US clients use this market.

“Bermuda is now the company’s global centre for cat business. Most of Hannover Re’s property-cat business is now written from Bermuda.”

As a strategic important subsidiary of Hannover Re, the Bermuda operation carries the same ratings as the group: an A+ from AM Best and AA- from Standard & Poor’s. The company was initially launched with €450 million ($536 million) in capital but, following the terrorist attacks of September 11, 2001, and the subsequent hardening of the market as capacity disappeared, a further €800 million ($953 million) was injected into the business.

This allowed the company to grow and become one of the largest property catastrophe companies in the market. Rentrup stresses that the company’s ethos is one that is committed to a technical underwriting approach. Modelling forms an essential part of its exposure analysis and is used beside the traditional approach to underwrite clients’ catastrophe risks.

Careful diversification

While the company’s main focus has been cat business, it has increasingly started to diversify in recent years although Rentrup says that the technical approach to underwriting is also applied in these new lines of business.

Over the years Hannover Re Bermuda has become a well-known market for workers’ compensation cat and personal accident cat business, lines of terrorism protection, marine, aviation retro and credit/surety.

Its UK motor book has seen some growth, and its cyber book is also growing.

“Hannover Re has a centre of excellence in cyber so we coordinate with them and underwrite business here. The cyber cat product is popular and growing and we are creating capacity for that. It is a sector that is evolving; the policy wordings are very important,” Rentrup says.

The importance of getting a handle on cyber risk is something of a passion for Rentrup. In an interview with this publication in 2016, he described the global influence and importance of the internet as having grown to the extent that “it has become like the world’s ‘central nervous system’ and cyber risk is now ubiquitous to our very existence as a result”.

He noted in that article that cyber risk pervades almost every other line of business but that the industry has not been diligent enough to either exclude or price for such risks under these lines of business.

As such, Rentrup stresses that while Hannover Re acknowledges the opportunity, the company is cautious in its approach to underwriting cyber risk. He says the reinsurer has developed in-house realistic disaster scenarios (RDSs) to constantly monitor the risks group-wide, which includes consequential cyber risks.

Thus far, he thinks the company has acquired a large percentage of the cyber reinsurance market and obtained a good understanding of the products and processes in place at different cyber insurers.

Never forget your roots

While Hannover Re is steadily diversifying Rentrup also points out the fact that many cedants still value its traditional lines and qualities and have a relatively traditional relationship with the reinsurer.

A good example of this is the way it uses the insurance-linked securities (ILS) space. While Hannover Re leverages ILS in a number of ways, including via its third party retrocession K-Cessions sidecar, which increased its capacity in January this year. Hannover Re (Bermuda) feeds business to this vehicle as do other parts of the group.

While more cedants are clearly using such solutions, the Bermuda company has not seen this affect its business in any way.

“ILS clearly has an important place in the industry and Hannover Re is an active user of and partner in ILS funds. We are not doing this directly from Bermuda—we just write traditional business here.

“We find cedants are pretty loyal to us and what we offer and there has been no big movement to ILS away from us. There is no reason to, given the pricing. There are more bonds being placed but the process is not cheaper,” he says.

“I see them as more as a supplement to excess of loss writers. The funds will never grow beyond a certain point. They won’t ever be employing an army on Bermuda.”

Within this traditional offering from what remains one of world’s risk capitals, Rentrup is in positive spirits. He believes securing Solvency II equivalence was a good move for Bermuda, making the market more robust and the regulatory regime beyond reproach.

He also sees growing opportunities to take on new risks—not just in cyber and terrorism but also in more natural risks that increasingly look uncomfortable sitting within the government’s mandate. Flood is a good example of this, and in the context of Hurricane Harvey Rentrup’s prediction that the private sector should play a greater role in this could become a prophecy realised.