Johannes Martin HARTMANN, CEO and Chairman of the Board of Directors, VIG Re

21 May 2024 — Daniela GHETU
Johannes Martin HARTMANN, CEO and Chairman of the Board of Directors, VIG Re

XPRIMM: Last year VIG Re has celebrated 15 years since the company was licensed to perform reinsurance activities. Over this period the company grew continuously, recording better results from year to year. Please provide for our readers more details on your company’s business – geographical footprint, main business lines, rating etc.

Johannes Martin HARTMANN: VIG Re was founded in 2008 as the group reinsurer of Vienna Insurance Group – the leading insurance group in Central and Eastern Europe. We still have this role, but in addition, since 2012, we systematically build our franchise with third party clients. Today, not only have of our EUR 900 million top line is generated outside of VIG Group, but the third-party business is the one which drives our performance. So, on the one hand, VIG Re is the largest reinsurance buyer in CEE as most of the assumed VIG business is retroceded, on the other hand the Third business drives our performance as we largely write this business gross for net.

CEE including Austria is still our home market, making up for about 65.2% of our topline. Here, we benefit from our superior market insights and understanding the specific needs of insurance companies operating in the region.

In order to expand our franchise beyond CEE, we opened branches in France and Germany in 2017 and 2018, in line with our principle to be close to the clients. Today, we generate a topline of about EUR 183.5 million in the branches, and another EUR million from other Third part business mainly in Europe and mature Asia. As we aim to support our clients holistically, we do not only provide non-life treaty, but also L&H and facultative reinsurance. The current strategy foresees a prudent international diversification of our client base, focussing in the first stage on developing our underwriting capabilities in the International Cat, Life mortality and facultative reinsurance segements.

Bearing part of VIG Group with a 200 year history, being a reliable long term partner for our clients is core for us. This is also underpinned by the stable A+ Financial Strength Rating of Standard & Poors, which we maintain unaltered for 15 years, and a strong solvency ratio of 220%.

XPRIMM: How do you comment on last years results in this context?

J.M.H.: Despite a year marked by a high number of natural disasters happening in our core markets – just to mention the February earthquake in Turkey, but even more concerning the increasing frequency of extreme weather events in ltaly, Slovenia, Austria, and other countries, we were able to report a very strong net combined ratio of 90.8% in 2023 and a record profit before tax of EUR 31.6 million. At the same time, we were able to consolidate our position as a leading reinsurer in Austria CEE with a premium growth of 10.9% and our 3rd Party business in other markets by 16.1%.

XPRIMM: The reinsurance environment was not an easy one in the recent years. How do you comment on the recent evolutions? What about the latest renewal season?

J.M.H.: Indeed, the reinsurance industry until recently did not earn its cost of capital in recent years. In my opinion, the main driver was the low interest environment, which triggered cheap capital that entered the reinsurance market , including alternative capital, leading to an unbalance of supply versus demand. In addition, we have seen the emerge of so-called secondary perils – mainly weather-related perils – which were in the past not recognized as peak perils and where loss models fell short in capturing the exposure development. As consequence of a continued soft market and higher than expected loss burdens reinsurers reported weak underwriting performance and were in some years in addition negatively affected by capital markets volatility.

As returns were disappointing and reinsurers balance sheets weaking, investors turned away. In interest rates - and inflation – are back, capital has a price again and the market has found a new balance. Since 2023, the talk is that we are in a hard market – but in my view we still have to see if premium levels on a risk adjusted premium level in property are actually sufficient to cope with the higher exposure. On casualty, an even more cautious, bearing in mind that we still face core inflation remains above interest rates of sovereign bonds.

XPRIMM: A hardening reinsurance market is obviously impacting on the direct business. There is a real possibility of leading to an increase in insurance prices, at least for certain classes of risk, a thus hindering the efforts made for reducing the protection gap. How do you comment?

J.M.H.: Indeed, in the past, a hard reinsurance market would often lead to rate increases in the primary insurance industry, especially regarding corporate business. However, this has not been the case in recent years. Corporate clients have faced significant premium increases in most lines of business while the reinsurance market remained unaffected. Nowadays, insurance companies have significantly increased their retentions. Reinsurance is now purchased to a much lesser degree to manage underwriting volatility. Consequently, insurance companies have more skin in the game and must manage the underwriting performance of their portfolios more effectively. In this context, higher insurance premiums are driven more by loss costs caused by inflation and exposure growth.

However, in my view, the debate addresses the wrong question. The correct question is whether the industry—insurance and reinsurance together—is able to charge an appropriate premium for the increasing exposure. Otherwise we are locked in a loose- loose situation. The fundamental task to close the protection gap is to enhance the risk literacy in the society. As long as there is a common believe, that a) I will be always the lucky one who will never be suffering from a severe accident or natural disaster and b) if this would actually happen, the government will bail me out, the insurance industry has a hard stand to close the gap. It is paramount to explain the benefits of having a proper insurance cover in order to protect what matters - and that this comes at a cost.

In this context let me add one aspect which I believe is paramount to close the gap: the industry will have to come up with new solutions and new products to cope with the evolving risk landscape. In the insurance of the future motor insurance or fire insurance will not be any more the backbone of our industry. New technologies - just to mention AI and quantum physics - will enable us to cope with current risk in a much more efficient way – but also creates new risks. And it is obvious that our world is not becoming a less risky place – looking at the impacts of rising geopolitical tensions, climate change or decreasing social cohesion - just to mention a few besides the ever accelerating technological and digital transformation we have to cope with.

XPRIMM: What are your expectations for the future evolution of the market, especially in what the CEE clients are concerned?

J.M.H.: On CEE insurance, still the story holds true that the insurance penetration in CEE will slowly catch up with western European markets, as GDP growth will be higher in the CEE markets. As main challenges I see in how far politics (both local and governments and Brussels) will provide stability for the market and be able to reduce overregulation and re-nationalisation tendencies.

As foe the CEE reinsurance, cedants and reinsurers benefit from the fact that the CEE provides an attractive diversification to an international reinsurance portfolio, which means that reinsurance terms are more favourable than in other markets (given lower cost of capital)

Challenges for reinsurers: ongoing market consolidation as large players (VIG, Generali, Uniqa, Allianz, PZU) already control more than 50% of the CEE market, and in addition increasing centralisation of reinsurance buying of insurance groups.

Challenges for cedants: for small cedents scale is often an issue, as they face high operational costs and proportional reinsurance commission might not cover any more their admin and acquisition costs.

VIG has an advantage, as it is the only Group in CEE who offers a well diversified CEE reinsurance book to its reinsurance partners.

XPRIMM: What is VIG Re’s development strategy for the capital increase? What are future plans do you have for the company?

J.M.H.: The increase of the share capital by 100 million of December last year and the authorisation to call in additional EUR 50 million until next year underpins the Company commitment to secure its financial strength while growing its business continuously with its business partners. Here, we focus to grow our business with our current clients in our current markets.

To a smaller extend, the capital increase reflects the decision to optimize our retrocession and to increase our retention going forward.

Finally, as significant part of the proceeds will be invested in our infrastructure to ensure VIG Re excels as a “seamless operator” and embraces technology for augmented underwriting, but also acts as a solution provider and trusted advisor for its clients.

While new technologies and process automatization will have a significant impact on the way how we will transact our business - maintaining our competitive edge on our cost ratio – I truly believe that people will still make the ultimate difference in our industry. In order to understanding the needs of our clients, building a trustful. Long lasting partnership - I see that going forward data and AI will play an ever-larger role in helping us to make the right conclusions and decisions - but I do not see robots fit to replace an underwriter nor a reinsurance manager for the foreseeable future.

Interview conducted by Daniela GHETU