Hannover Re cites cloud outage cat bond & parametrics as areas of innovation

Global reinsurance company Hannover Re said today at the Monte Carlo Rendez-Vous event that innovation remains on the agenda even while demand for traditional reinsurance remains high, citing examples of parametric risk transfer and its recent cloud outage cyber catastrophe bond.

The global reinsurer is expecting continued and ongoing demand for high-quality reinsurance capital and protection over the rest of this year and into 2025.

There is a preference for the non-proportional areas of reinsurance and Hannover Re says that terms and conditions continue to be attractive, particularly in this area of the market.

While the company is also hoping for relative stability in the market, as it targets profitable growth, saying it believes price and terms have stabilised.

Anticipating a balance of supply and demand at the key January 2025 reinsurance renewals, Hannover Re says the market remains favourable, although again expresses its preference for non-proportional business given where primary rates sit.

“We want to grow with our clients and continue to offer them the best possible coverage and capacity. To do this, rate levels must remain adequate,” explained Jean-Jacques Henchoz, Chief Executive Officer of Hannover Re. “Insured losses are still trending higher. In view of the various challenges facing the industry, reliable reinsurance protection is indispensable. In line with our strategy, we remain well positioned for profitable growth and a preferred business partner with our clear focus on reinsurance, our excellent underwriting expertise and our very strong capital base.”

Identifying new opportunities to help clients with emerging risks is a focus for Hannover Re and the company cites some of its work in the cyber insurance-linked securities (ILS) market as one example.

Earlier this year, Hannover Re has sponsored a $13.75 million Cumulus Re (Series 2024-1) parametric cloud outage catastrophe bond that was privately issued and placed using the firm’s Kaith Re Ltd. vehicle, with modelling of the cyber risks undertaken by Parametrix.

On this deal the company said today, “Losses associated with cyber risks are increasing substantially owing to digital transformation and technological advances. To tap into additional non-traditional capital for cyber risks coverage, in April 2024 Hannover Re brought to the capital market the world’s first catastrophe bond to protect against risks resulting from cloud outages.”

Sven Althoff, member of Hannover Re’s Executive Board, explained why addressing such emerging exposures is important to Hannover Re.

“While there is still a need for action on cyber risks, climate change is and will remain one of the greatest challenges of our time. Recent floods and heatwaves have once again highlighted the continued dramatic proliferation of extreme weather events. This is a strain on the economy and is increasingly putting insurers to the test,” he said.

Althoff went on to highlight other areas of innovative protection that Hannover Re has a focus on include parametrics.

Saying, “At the same time, the protection gap is widening as losses rise, especially in emerging countries. This is where innovative concepts such as parametric covers can help to cover climate-related risks and offer more insurance protection.”

Looking at the renewal prospects for end of year, Hannover Re said that in Europe there is “no room for rate reductions” from the reinsurers’ perspective.

The company sees continued pressure for primary insurers in the US, with a range of factors that have been driving prices for reinsurance higher persisting.

In catastrophe reinsurance Hannover Re said that, in the US, “rising demand for reinsurance capacity” is expected, while “the market environment should again remain attractive in 2025.”

In Europe the company said, “In view of the severe floods in Germany in 2024, further efforts are needed to support catastrophe business on a sustainable basis.”

While on Japan nat cat, “The reinsurance market in Japan showed considerable discipline in the 1 April renewals, with market demand holding stable. The earthquake risk in the region was once again evident in 2024, even though no appreciable reinsured losses were incurred. Substantial flood and typhoon losses as well as hail events in the past two years similarly underscored the need to factor all climate-related perils into the pricing of Japanese catastrophe business.”

And in Australia and New Zealand, “After many years of major natural catastrophe events, the region has escaped unscathed this year. Multi-peril risks remain, however, and insured values are rising, driven in part by inflation. This will likely continue to fuel demand for catastrophe coverage, while Hannover Re will concentrate on offering such protection at commensurate prices and with adequate retentions.”

Finally, Hannover Re noted its record levels of activity in the catastrophe bond market.

As we reported in August, in 2024 Hannover Re has beaten its own full-year record for catastrophe bond limit fronted for already.

The company said today, “In the insurance-linked securities (ILS) market, Hannover Re was once again able to transfer several catastrophe bonds to the capital market for its customers. Following on from ten transactions in 2023 with a total volume of USD 2.8 billion, ten transactions have already been successfully completed in the first six months of 2024 with a total volume of USD 3.4 billion.

“Covers were placed against losses from natural catastrophes including floods, windstorms and earthquakes. It was also possible to structure a parametric cloud outage cover, under which this risk was transferred to the capital market for the first time in the form of a bond.”

Our figure was slightly lower, so we clearly either missed a deal or have not included it in the right year, perhaps attributing it to 2023.

But, either way, Hannover Re’s role in the ILS and cat bond market continues to expand.