Wilhelm Zeller admits losing money on US catastrophe business

Vendor models have taken over catastrophe pricing during the past decade. While the resources allocated to their development should ensure that they make use of the best brains in insurance, some commonsense is still needed.

Hannover Re’s thorough analysis of its US catastrophe business clearly indicates that the business has not been profitable in the past 20 years. Even when rates and the cost of capital are assumed at today’s level, the result still remains negative.

Reducing the Hurricane Katrina loss to the size of a 20-year hurricane does not change the picture either. In addition, all this time we were on risk for earthquake losses – and yet we could not set aside a single dollar for the “Big One” in California that we know will eventually happen.

Much to our frustration, catastrophe bonds are priced substantially better than traditional reinsurance. One argument in support of this is that traditional reinsurance supposedly has the benefit of diversification. This holds true for “normal” reinsurance business, but does not apply to peak zone exposures. Thus, traditional reinsurance should be paid the same as catastrophe bonds.

Hannover Re is confident that rates for US catastrophe business will rise significantly in the upcoming renewals. But we are ready to reduce our capacity and allocate it to catastrophe bond investments if this doesn’t happen.

Wilhelm Zeller is chief executive officer of Hannover Re.