Ulrich Wallin, the Chief Executive Officer (CEO) of reinsurance giant Hannover Re, has underlined the fact that climate change is not included within current catastrophe pricing, adding that pricing is not sufficient to deal with increased catastrophe losses.
Hannover Re recently announced a solid January renewals season, which, keeps the global reinsurer on track for its 2019 profit targets.
At the same time, the firm announced that for the first time in three years it increased its large loss budget to €875 million, which is driven by its catastrophe modelling, explained CEO Wallin, during the firm’s renewals media call.
“We model the expected loss on a gross basis then we take off the alleviation from retro and that is then the basis for the large loss budget. On man-made losses it is more of a long-term average, we take into account that the book has grown, and therefore we have seen this growth in the budget, and it is largely model driven,” said Wallin.
The reinsurer’s share of natural catastrophe business remains smaller than its non-nat cat business, and Wallin explained that this is a position the company is comfortable with.
In light of higher cat losses in 2017 and 2018, during the call, the CEO was questioned on nat cat pricing and also the potential impacts of climate change, to which he explained that “climate change is not included within current cat pricing, and pricing would not be able to deal with increased cat losses.”
Whether climate change is resulting in more frequent and severe adverse weather events is an ongoing debate, but regardless, the fact remains that catastrophe reinsurance pricing is insufficient to deal with increased losses, whatever the underlying cause.
Wallin, in a discussion with Reinsurance News, expanded on this point: “In 2017 and 2018, we had above average large losses. If that was an aberration and it goes back to the expected loss level, then the current cat pricing would be able to handle that. But there’s of course also the possibility that the rising of cat losses will continue. If that’s the case, the current cat pricing would be insufficient.
“It’s not so much of a problem if the losses are rising gradually. Then we would always say that our strategy to have a lower market share in catastrophe business than in non-catastrophe business is probably a good strategy. It would only become a problem if you have a sharp increase that you cannot adapt your pricing to be based on the capital that is in the market.”