Reinsurers’ summer of love – Hannover Re’s Henchoz

Jean-Jacques Henchoz, Hannover Re’s CEO, was the latest Voice of Insurance guest, discussing the happy equilibrium that characterises the reinsurance market before its decision-makers fly to Monte Carlo, as well as addressing the topic of AI for reinsurers.

As the summer months culminate with what host Mark Geoghegan calls “the festival of reinsurance” that is the Rendez-Vous de Septembre in Monte Carlo, the market looks to be in good shape, Mark suggested, something Jean-Jacques Henchoz was happy to agree with.

Hannover Re’s chief executive was featuring on the podcast for a fourth time and gave his views on “the state of the market”, prior to darting into Monaco for the rendezvous in just a week’s time.

The current happy market equilibrium follows “a reset” in 2022-2023 that “pushed the industry to show discipline, rigor, consistency and rate adequacy”, Henchoz emphasised, with the result that “we are in a much better place”.

Within this equilibrium, cedants have accepted that the step change in pricing and structures that occurred for that reset, while capital influx has been modest, not counting retained profits and insurance linked securities (ILS) growth.

“The notion of equilibrium is a fair one,” Henchoz said. “You never know where the market is going the following year. But we’re at a place where, as a company, we feel that most of the business we renew [and] put in our books is fairly priced and gives us confidence for the next one or two years.”

He continued: “There’ll be some rivalry, as always, it needs to be competitive, but it feels that we’re in the right place. But we needed this reset back in ’22-’23. It was not sustainable for the whole industry, even if Hannover Re was an outperformer, as an industry, it didn’t work.”

Henchoz thinks it needs at least a couple more years of good performance for investors to “regain true confidence” in reinsurers, with many preferring the ILS market for its simplicity. He does not expect a major wave of new capital and/or new reinsurance entities as entrants to come into the market in 2025 or 2026 – it would have happened already.

Holding the line

With the hard market came a shift from a cheap and plentiful supply of reinsurance capacity for earnings protection – aggregate covers and low attachments points – to its higher cost and restricted supply, to protect insurers’ capital. Mark asked whether the current market means buyers “can get more of what they need, not necessarily all of what they want”.

Henchoz, in response, looked to hold the line on discipline, in terms of where the equilibrium leaves clients’ purchasing possibilities ahead of 1/1 2025 renewals being discussed in Monte Carlo.

“We feel that a large part of that necessary reset was the change in attachment points that creates a bit more ‘skin in the game’ and a more balanced sharing of the enormous risk exposures we’re taking on our books. We’re not open for business when it comes to challenging that necessary reset at this stage of the market,” he said.

“This being said, of course, there are many different clients’ motivations, and in some instances, that element of smoothing over time could be the driver for an open discussion with respect to structured solution. We’re willing to look at it with our structured team on a purely traditional basis. We’re still reluctant to shift back to the old world,” Henchoz continued.

The key to whether these conversations will go anywhere, at least with Hannover Re, he suggested, are the motivations of the cedant. If it’s about pushing the price alone, he suggested the reinsurer was not interested.

“If the motivation is related to the price of the coverage, of course this will not work. If this is to manage the portfolio over time with a multi-year view, I think that’s a good discussion, which we should always have, independent from the market cycle we’re in. The door is open,” Henchoz added.

AI everywhere

Henchoz highlighted the phrase that artificial intelligence (AI) is simultaneously being overhyped and underappreciated.

“There is a bit of hype,” he said. “We should not have, this fear of missing out every day. On the other hand, is clear that it’s going to transform many sectors, and therefore the risk profile of many industries.

He continued with a warning about AI’s financial crime applications, getting into the world of deep-fakes as potentially the next generation of phishing fraud risk facing firms and their employees, requiring a focus on standards of security, regulation and ethics.

“The risk of fraud is going to increase significantly,” he said. “You could use my voice based on a half a minute clip, and then have a video with my voice in any language now and ask for $1m from an employee at Hanoi. This happens on email today; it might happen on video in the future.”

Mark asked Henchoz for his reinsurer’s view on where he sees the best use cases for AI. His first thought was to monitor how cedants are innovating in this space, with AI leading to better understanding of portfolios underwritten at primary level before risk is transferred to a reinsurer.

“We see a lot of use cases around the client’s journey, you know, simplifying the way insurance is purchased, how claims are being processed,” he said.

For reinsurance, the focus is more on scalability and automation of processes, changing the use case, because treaty reinsurers’ business does not involve a vast number of clients or policies like primary firms, but rather with large client treaties, he suggested.

“Nevertheless, we feel that the technology could help us becoming more efficient in our back-office activities, and we have a number of use cases already which allow us to process a growing number of treaties businesses without having to increase headcount as much as we would [had] we not had the benefit of the technology,” Henchoz said.

“But down the road, I hope that AI will allow us to do even better underwriting, to relieve the underwriting community from some non-adding tasks, to focus on analysing the data and analysing the risks. Of course, on the modelling front, there’ll be some improvements as well,” he added.