German reinsurer Hannover Re may stop buying traditional retrocession altogether when its programme comes up for renewal in May this year.
The heavy losses from the 2005 hurricane season hit the retro market hard. Retro capacity has been very difficult to come by and where available has been prohibitively expensive.
The reinsurer is unlikely to buy any more traditional retro cover than it did last year. “The renewal of the main part of our programme is on May 1. It might not come as a surprise that the retro market will be damn expensive,” Wilhelm Zeller, Hannover Re’s chief executive, told reporters at a presentation of his firm’s annual results. “It is not attractive to buy more at such uneconomic prices” He adds: “We may end up buying nothing from the traditional market.”
There are four parts to Hannover Re’s retrocessional cover. The first is its catastrophe bond, called K5. This was issued on February 3 this year to replace its predecessor, K4, and provides Hannover with $370 million of coverage. It covers non-proportional property-catastrophe, aviation and marine reinsurance treaties.
The second is the traditional cover. The third is what Zeller refers to as structured cover, which is essentially finite risk retrocession. And the fourth is risk swaps.
The company may boost one of the other parts of the cover if it cuts back on traditional retrocession. One likely candidate is the structured cover. “We might decide not to buy traditional retrocession and may have greater recourse to the third level of protection,” says Zeller. He adds: “We will have enough protection in place at the beginning of the hurricane season.”
One area where Hannover is looking for more protection is reinsurance recoverables. “We are considering securitising reinsurance recoverables,” said Elke König, Hannover Re’s CFO, at the same presentation. “We have been saying on and off that we will consider it. We looked at it in 2003 and found no real risk-reward. For the time being it is on again. We are working on that.” She adds that nothing has been finalised yet.