Annual Report 2005 - Hannover Re

Annual Report 2005 - Hannover Re

Management report


The treaty renewals in property and casualty

reinsurance as at 1 January 2006 – the date

when roughly two-thirds of our portfolio was

renegotiated – were highly satisfactory for our

company. Although not all our expectations were

fulfilled, we were still able to surpass the already

very high rate level in some areas.

The updating of pricing models to take account

of the experience gained in the wake of

last year's hurricanes has also contributed to this

favourable rate trend: the market fully accepted

the enhancement of pricing models to include

loadings for previously omitted or inadequately

modelled components such as cyclical climate

fluctuations, flood and inundation losses, business

interruption and demand-driven price increases

for restoration services.

In addition to adjusting our models we reduced

our peak exposures as part of our risk management

measures. With a roughly unchanged

premium volume, our property and casualty reinsurance

portfolio is thus ideally poised to face

the challenges of the current year.

We used retrocession, i.e. the passing on of

portions of our covered risks to other (re)insurers,

as a further element of our risk optimisation. Bearing

in mind the considerable losses incurred by

retrocessionaires, we expect to see an overall increase

in the price of our retrocessions – some

of which are agreed on a multi-year basis.

It was once again evident from this year's

renewal season that ceding companies are attaching

ever-greater importance to a reinsurer's

rating. This is especially true of the underwriting

of long-tail casualty business, where a very good

rating is absolutely indispensable. Hannover Re

is one of the few reinsurers that continues to

satisfy this condition without reservation on the

basis of its very good ratings ("AA-" from Standard

& Poor's and "A" from A.M. Best).

In light of our above-average financial

strength rating we profited disproportionately

strongly from the sustained hard market; indeed,

in segments that had been hard hit by last year's

hurricane events we were able to obtain sometimes

appreciable rate increases. Even in sectors

that had been spared major losses we recorded

for the most part at least stable – and hence

highly attractive – rates.

The most marked changes, however, were

observed in this year's marine reinsurance renewals,

and especially in offshore business. The

severe losses incurred as a consequence of last

year's hurricanes prompted wide-ranging restructuring

of the reinsurance programmes. Many programmes

are now split into catastrophe-exposed

(Gulf of Mexico) regions and those areas with no

correlation to catastrophe events (other exposures).

We were able to substantially reduce our

peak risks across the board in our marine portfolio

while at the same time achieving significant

double-digit price increases.

In credit and surety reinsurance the situation

continues to be favourable in the current

year. There has been no significant price erosion

despite extremely low loss ratios in the year

under review and adequate rates. Although the

rate level declined slightly in credit insurance, it

remains high. Rates for surety business were more

or less unchanged. All in all, in this line too it is

evident that considerably greater importance is

being attached to the financial standing of reinsurers.

In some instances this enabled us to

write larger shares and acquire new business,

thereby in large measure offsetting the decline

in premium associated with the sometimes substantially

higher retentions carried by primary


The treaty renewal season for our property

and casualty business in Germany went off better

than expected. Ceding companies have generally

retained a higher level of premium for own

account, hence causing our premium volume to

contract slightly. On the other hand, we were able

to further enlarge our customer base. In the year

just-ended we observed increasingly fierce competition

among insurers – especially in the industrial

fire and motor lines, but also to a limited

extent in industrial liability business. We therefore

scaled back our proportional acceptances in

these lines so as to write more non-proportional

business. The renewals in German catastrophe

business were also satisfactory. The anticipated

erosion of conditions failed to materialise, doubtless

in part due to the tense state of retrocession

markets already overtaxed by the hurricanes in


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