Ep315 Clemens Jungsthöfel, CEO Hannover Re: It still feels like a speedboat

0:02Clemens Jungsthöfel: I'm Mark Geoghegan and you're listening to the Voice of Insurance podcast, produced in association with Advantage Go, now part of Sapiens, enabling an enterprise view of exposure. Today's podcast is with someone who has one of the biggest and most important and influential jobs in our industry. You wouldn't necessarily know that if you spoke to him. As the CEO of Hannover Re, Clemens Jungstoffel may be carrying a very large reinsurance stick, but he speaks very softly. He's approachable and someone who inspires trust. You get the feeling you could tell him anything or come to him with a very delicate problem and he would neither be shocked nor would judge you too harshly, but just calmly help in any way he could and point you in the right direction.

0:44Clemens Jungsthöfel: Clemens personifies a very clear continuum of the reinsurance leaders who came before him, and a listen to this discussion with him will go a long way to help you understand the enduring success of the reinsurer that he and his predecessors have managed to build. And what they've constructed is an all-permeating reinsurance culture that works for the real world. As we head down to Monte Carlo, this podcast covers everything you would expect it to. We examine the state of the market and Hanover Re's positioning within it in great depth and we debate some of the hottest topics of the day, most pressingly, the emergence of AI into the global risk environment.

1:21Clemens Jungsthöfel: But what I think will endure after time erodes the relevance of what we're discussing is a timeless sense of who my interviewee is and the institution that he represents. Approachable and friendly, calm, strong, knowledgeable, consistent, measured, flexible, responsive and pragmatic are all words that come to mind. And I think we can all agree that these are absolutely the qualities we're looking for when we're buying reinsurance. Listen on and see if you agree. Enjoy the podcast. Clemens, welcome back to The Voice of Insurance. It's great to see you. I can't believe it's already a year since we last spoke.

1:58Mark Geoghegan: Mark, yes. Thank you for having me again. And you're perfectly right, time flies when you're having fun. I can't believe it either. It's been almost a year, yeah, crazy times. And here we are again.

2:09Clemens Jungsthöfel: Yes, I think it has been a pretty good year since we last spoke. Another good year, should we say. What's the state of the market at the moment? I mean, the reason why we're having this conversation now is, of course, we're coming up to Monte Carlo, we're going to be meeting all of our customers and counterparties again, in person down on the Côte d 'Azur. What are we going to be talking about when we get down there? But anyway, let's start by how do you see the state of the market today?

2:33Mark Geoghegan: Yeah, I don't know what the maximum duration of a podcast can be, Mark. So how much time do we have? I mean, a big question to start with. It's a whole world out there, isn't it? And it's not all the same market. I think that's it. If we just get into the helicopter mode for a second and look at the world from above, it's, I would say, interesting times, really, with some really powerful forces, I would say, affecting also the reinsurance landscape. So on the one hand, you have a risk landscape, which, despite me being rather an optimistic person, Mark, as you might have sensed, can feel quite scary these days.

3:07Mark Geoghegan: I mean, if you look at some of the geopolitical conflicts, wars, the general tendency to, let's say, nationalism, protectionism, fragmentation. And even if, let's say, some of the conflict parties would return to the negotiation table one day, I think it would be naive to think there is anything like back to normal. So with all that comes with the trade barriers, supply chain disruptions, and the macroeconomic the impacts of that, be it inflation, be it also massive government debts. I just saw the US coming out with their numbers. And then, of course, being in the reinsurance business, of course, climate change.

3:46Mark Geoghegan: And despite the fact that we've seen a more benign, large nap cut, let's say, quarters, the trend is very clear. And I remember vividly, Mark, when we spoke last year here, we spoke about also the first quarter. When I took over from Jean-Jacques, first of April last year, And I said, thank you, Jean-Jacques, for that first quarter. That doesn't make my life easy. With the California wildfire being the largest, I think, actually the largest claim on our list, on our large lost list ever. So there is volatility. And then, of course, and I'm sure we will talk about technology, AI later, the speed of technological change as an innovation is breathtaking.

4:23Mark Geoghegan: So all of this, if you put it all together, let's say the world has become more complex. So the need, it's been a debate with our clients, with brokers in the recent conversation. The need for high quality reinsurance, the need for, let's say, a shock absorber in this quite complex world is ever increasing. So helping our clients to navigate that difficult landscape, manage volatility, is clearly something that will be on the table, no doubt about it. And then, of course, you see other underlying growth factors in emerging markets. But then that, let's say, increased demand meets, of course, plenty of capital.

5:05Mark Geoghegan: And I think insurers, reinsurance have accumulated quite some capacity. So traditional capital being in the market, so that there is plenty of capital in the market from traditional players, but also from alternative players, of course.

5:18Clemens Jungsthöfel: So it's good to hear about demand. If you sell shock absorbers, bumpy roads are good for business. Oh, they are.

5:24Mark Geoghegan: I mean, let's not forget that's what we're here for. manage that volatility and we shouldn't be scared, but it is just all about having a good view on the risk, et cetera, and then that's it. And I hope to start with, Mark, that the memory is not just only three, four years because I remember sitting in front of investors, let's say mid-2022, and they were quite fed up with the reinsurance and the reinsurance market, not earning the cost of capital for, let's say, five, six years in a row. So let's just be mindful and we really try to have that long-term perspective on the market

5:56Clemens Jungsthöfel: No, we don't want to be sitting on that chair explaining to investors why we managed to get it wrong so many years in a row. But the market, by all accounts, is more competitive than it was this time last year. We knew it was already quite competitive then, and it was going to be more competitive. I suppose the theme of last Monte Carlo was that everybody was still quite happy, and they were happy to give up a little bit of rate because they felt, I suppose, that it was very difficult to justify holding on to some of that rate with so many combined ratios, with an eight in front of them instead of even a nine.

6:26Clemens Jungsthöfel: and everybody's still happy to grow into that market. That seems to be completely different now. Now we've had last year's renewal described by many observers being two years worth of softening in one go. So that is effectively a negative surprise and negative surprises tend to cause a reaction. If everybody says they want to grow and they don't mind giving up a bit of rate, of course, why should anyone be surprised that rate might fall off a bit quicker than we were planning it to happen because of everything so dynamic? One, was it a surprise to you? fundamentally and two if it was a surprise have you had a negative reaction because generally a

7:01Mark Geoghegan: negative surprise causes a negative reaction look i think you're perfectly right mark and particularly that i think that development has been accelerated by the fact that it had been rather benign quarters etc so underlying profitability look good if you print roes above 20 i mean clearly there's no surprised that people look at their portfolio. I would say, though, that the narrative and the headlines have been very much dominated by, of course, Property Cat, and particularly in some jurisdictions like the US, et cetera. So all that double digit rate declines, et cetera, price declines, been very much dominated.

7:37Mark Geoghegan: If we just look at our book today, if I just look at how our book probably 10-15 years ago looked like. It's a much more diversified and much more resilient book nowadays. So Property Cat is, I wouldn't say a fraction, but still, you know, just one line of business in a certain jurisdiction. But it's true. We have seen quite strong price competition in some areas of the market. I think that's very true. Overall, I would say our appetite for profitable business does remain unchanged. We want to grow, as you said, where prices and risks are aligned. It doesn't help anyone, neither the primary insurer, not the reinsurer, nor the ultimate policyholder.

8:22Mark Geoghegan: The prices are not adequate. I can't reiterate that often enough, but I think there is clearly a risk appetite. In many cases, I believe we can still grow alongside our clients. And if you just look at our portfolio today and the growth, where it came from the last 10 years, I'd say, really with our existing clients. So strengthen and broaden that client relationship. And I think that's very important. Having said this, I would say we generally assess each contract by itself. So every contract that really wants to be written needs to meet our minimum margin requirements, our hurdle rate. So there's no change in strategy, no change in approach in that sense.

9:01Mark Geoghegan: I think we always joke about this, Mark, but I think it becomes very tangible. Our low cost ratio here and the low admin expense rate, of course, is helpful to write that business a bit with a longer margin, probably for longer. So therefore, generally, there is still, and you mentioned it, Mark, we're coming off, I think, quite a high level. Again, I still remember those five, six years where prices were not adequate, but we're coming from peak levels.

9:27Clemens Jungsthöfel: You're still feeling that most of what you're seeing is writable, is adequate, and something that's going to hit the return hurdles that you have set for yourself? Yes.

9:35Mark Geoghegan: And let me just for one second, let this old CFO speak in me. If I just look at our metrics, at our IFRS 17 metrics, the loss component is margin. It's really like a very tiny number. So you can see that business assisted profit making. I mean, we just reported our Q2 numbers, the CSM of new business, hence the stock of future profits. the business that we're writing was 12-13 % down compared to the first six months last year. So that's still quite an attractive level. So there's still opportunity for us to find profitable business together with our clients.

10:10Clemens Jungsthöfel: I was reading that Q2, obviously, preparing myself for this interview. And you talked about that strategy of gaining a greater share of your customers' wallet. And it certainly seems to have been working well. So the way that the numbers stacked up, it seemed to be absolutely certain, absolutely true. How far can that strategy go now that you're at a massive global range or a scale now? Maybe 10 years ago, you could say, hey, we're the plucky outsider. We're slightly the sort of underdog. I'm British. We all love the underdog. And we sort of never quite liked the great big incumbent, the sort of the bigger players.

10:42Clemens Jungsthöfel: But now you can't really play that card anymore because you're almost as big as everybody else. I mean, it depends. We wait until AMBest comes out with their numbers every year and work out. You're absolutely in a peer group with the others. You can't be the underdog anymore. How far can you go with that strategy of gaining a greater share of wallet? Because of course, everybody's got security committees, and there's only so much counterparty risk they're allowed to allocate to you, even if they would like to do more.

11:04Mark Geoghegan: It's a question we will talk about probably every year, you know, is there a limit to growth, etc. And for me, look, I mean, you're perfectly right. We've grown into a large reinsurer, whatever number you put it, let's say the largest reinsurer. And I always say and that's why I like my job so much, is it's so much fun to work on a speedboat. It still feels like a speedboat and our clients and brokers still feel that. And I remember, I think it was probably a podcast that you did with Jean-Jacques, my predecessor, in 2022, where I think the headline was, is there a glass ceiling or no glass ceiling yet?

11:38Mark Geoghegan: So now I guess that will be a recurring theme. And if you just look at the growth that we've shown since 2022 and over the last 10, 15 years, that really like this growing together with our existing clients and having that long-term view, that long-term consistent partnership view. And this is no advertisement. And I think I mentioned it last time, you know, I hear that consistently from clients and brokers. And then it becomes very tangible when they say, well, actually, we just like to do business with Hannover E. This execution certainty, the speed, the pragmatism and all that. And you always come up with a solution, even if it's difficult.

12:15Mark Geoghegan: And then the consistency. And I think clients love the consistency that we are very upfront. We don't say yes to everything, but we are usually very upfront. So therefore, I think there's plenty of growth to exist, to grow with our existing clients across lines of business and regions. I just came from a broker meeting. And if you sit down with your brokers and say, well, you're already quite high up on our panel. However, you haven't even seen half of our clients. So what about those? So I think there is still room for us to grow. Diversification, of course, remains a core principle of our management.

12:51Mark Geoghegan: And then again, we don't grow for the sake of it and not for any market share. So it's really for profitable growth. What we still see, to your point, Mark, is that some clients really try to reduce the complexity in their reinsurance panel. So that clearly also offers opportunities for us. So even if with some clients we are getting closer to the optimum to both sides, I think there's still plenty out there. It might not be that easy to go from, let's say, 5 to 10, then from 10 to 15, let's feel like that. But again, it's still plenty of room.

13:25Clemens Jungsthöfel: Yeah. And of course, I suppose as long as insurance GDP grows, you can take your share of that. If insurance is growing as an industry, then you will get that growth just by dint of being Hannover Rhee at that point, one hopes.

13:38Mark Geoghegan: Absolutely, Mark. And then, I mean, we always talk about the protection gap, you know, insurance, pre-alitation. There are areas, there are markets, they are completely underrepresented. So let's really try to get that tackled and address that. And with the GDP growth, with tackling that, there's still plenty of underlying growth that we need to tap into.

13:58Clemens Jungsthöfel: Are there any parts of the market where you can see particular strain? Obviously, the biggest gain, let's say, of this last HUD market was the resetting completely of industry attachment points for reinsurers. So you won't stop picking up the traditional losses. Where are we now? Is that starting to come under pressure? It seems like this is the red line, the ultimate red line. Of course, we know what the market is like. Sometimes there's a red line and then somebody jumps over it and it's completely erased and everyone's forgotten about it. Where are we now on that question?

14:28Mark Geoghegan: I think, Mark, we spoke about that memory, how long that will last, etc. And you're right, you know, it's first all about prices, etc. But I think the big achievement for both sides of the equation has been the reset in the 1-1-2023 renewals on terms and conditions, on attachment points, etc. Because it doesn't help if the frequency sits either, you know, with the reinsurer, because I think price at equity needs to be addressed in the first place with the ultimate policyholders. So therefore, I think there is a fundamental view, hopefully, that holds true. And my colleague Smanaltov spoke about it, I think, also in the YouTube call.

15:05Mark Geoghegan: He said, well, terms and conditions are largely stable at still a good level. Structures do remain broadly stable. Current attachment points are holding up well. In some fewer cases, the mid-tilted decedents have increased, let's say, their retention levels, just purely because they can manage the volatility, they can handle the additional exposure. So discussions that we see at the moment, Mark, they do continue around rather frequency risks, secondary perils driven in part by the topics that we mentioned earlier, climate change, droughts, wildfires, other weather events gaining in relevance.

15:42Mark Geoghegan: So that's more the debate. In general, our position is we are generally, I would say, retention level agnostic. Having said At this, at lower levels, the structures of the product might just have to change to more structured solution, which is a big part of our portfolio in PNC. So with lesser annual risk transfer, but most importantly, is the risk adequate premium again? So really to be in line with that increased risk landscape and the frequency that comes from those secondary repairs.

16:13Clemens Jungsthöfel: Going back to the motor analogy about the shock absorber, sometimes you don't mind selling tires as well. I'm going to say the tires are the attritional load bearer, aren't they? And the shock absorbers are there for the big ones, for the big bumps. But occasionally, as long as the price is right, if someone wants something which is a bit of wear and tear, then that's okay.

16:30Mark Geoghegan: Yeah, I mean, if it helps for those clients to manage their volatility, I think there's always a solution. I think we need to be innovative in this complex world, to be part of the solution, to remain relevant on both sides. I think coming to a solution.

16:45Clemens Jungsthöfel: Going back to the question of attachment points, what often happens with attachment points is they stay fairly static while, of course, the world inflates, while everything else inflates. The attachment point stays really generally static year after year. We're in a period of above-average inflation, not necessarily high inflation, but inflationary times. Are those attachment points keeping up with inflation, would you say?

17:07Mark Geoghegan: Yeah, at the moment, I think they do, Mark, both in terms of prices, attachment points. We revisit our position on a regular basis. We actually have adapted also in our recent renewals to the new inflation expectations. So that's part of the exercise we do on a regular basis, because I think it's very important.

17:29Clemens Jungsthöfel: Because otherwise, it's the sort of silent killer, isn't it? Yeah. If you don't change the attachment point after five years, and we have four and a half percent inflation for five years, it makes a huge difference to where you really are, doesn't it?

17:39Mark Geoghegan: Yeah.

17:40Clemens Jungsthöfel: I've been following Hanoveri for many, many years now. And you're a great participant in the marketplace because you're a buyer as well as a seller. You're a trader, a good trader in the market. And so you can have that empathy because you also buy and you do lay off risk yourselves. Given the way the market is at the moment, it's an attractive market for a buyer. You do buy reinsurance and buy retro new layoff risk to alternative capital markets. Those markets are liquid and full of appetite. Is this a good time to be buying more yourselves? And perhaps, you You know, your net is going down a bit.

18:12Mark Geoghegan: To start with, Mark, it's really interesting. You know, if I talk to our underwriters for the Inwards business and they complain about, oh, the price declines are a bit heavy on property cart, I just talk to our retro people. They would say, oh, Clemens, it's a great market out there. So you just change perspective. No, look, I mean, this has been a very consistent long-term way of managing our volatility, of managing our capital, very capital efficient. So this is really retrocession, has been and will be a long-term strategy for Hanna-Brie. And that doesn't really change. So we will continue to buy those covers.

18:46Mark Geoghegan: We are currently buying, dependent, of course, on the attractiveness of terms offered. We may buy a little more limit here and there rather than less. So there's a little opportunistic element in it, but generally it's a very strategic, it's a strategic pillar.

19:02Clemens Jungsthöfel: Right, okay.

19:03Mark Geoghegan: It has served us quite well overall. So retro is complementing our diversification in the interest of turning that volatile business of risk coverage into reliability for our clients and, of course, for steady returns for our shareholders. And if you just look at the comments of analysts, et cetera, they do appreciate our retro strategy because it does give us the edge to deliver our earnings growth and the attractive ROE with less volatility. And that has been very appealing for investors. And I consistently get those comments. And then generally, as you know, Alternative Capital, ILS, collateralized fronting, our new family member, Hanover E Capital Partners.

19:47Mark Geoghegan: I think they do remain a pillar of our strategy as well. So that works quite a bit often.

19:53Clemens Jungsthöfel: Something in terms of laying off risk, something that's happened in the last year since we last spoke has been the emergence of the Lloyd's market emerging as a reinsurance conduit with the special purpose, special reinsurance captive syndicates. We've had some very large global players starting up to use the Lloyd's market in that way, which is a very innovative use of Lloyd's market and hopefully will be beneficial for everybody. If it's done right, I should hopefully lower the cost of doing business at Lloyd's ultimately for everybody. You're already in Lloyd's. Is this something, a sort of structure that might appeal to you that I'm sure you thought about it when you saw the headlines?

20:27Mark Geoghegan: Yeah. I mean, I'd say generally, Mark, we are happy, as mentioned, you know, with our retro strategy. It is long term, et cetera. So we have a diversified pool of capital, which we are generally happy with as of now. And as you said, though, the Lloyd's market is attractive, since there is quite a diversified and very...

20:47Clemens Jungsthöfel: A different sort of capital. It's another channel of capital and probably slightly different capital. As we know, there's so many different types of capital and different risk appetites, and it just seems to be another one. Exactly. Obviously, it sounds like it would be diversificatory for most buyers. Yeah, absolutely.

21:02Mark Geoghegan: So really, you will find quite diversified and very knowledgeable group of retro investors at Lloyd's. They're using it. So that would actually fit nicely in line with our diversified long-term oriented investor base, that overall approach. So if we were to utilize such a strategy, we would always prefer doing it with growth in our retro and then for further diversification of our overall retro investor base, which is quite nicely diversified, but that would be the main reason why we would do that much.

21:37Clemens Jungsthöfel: One question, probably rewinding a bit about growth, where are you finding it best, going back to the helicopter or the satellite, looking down upon your global diversified portfolio, where are you happiest in terms of where you're getting the most profitable growth opportunities?

21:52Mark Geoghegan: I think on some we touch, you know, generally, I think the growth opportunities continue to come from rising insurance penetration, particularly in emerging markets. And then, of course, with the overall economic growth and inflation, etc. In terms of lines of business, I'd say structured re-insurance remains attractive. As many insurers, our clients still see capital relief, earning stabilization, and also volatility management solutions. So really trying to come up with innovative solutions, helping our clients is really like bespoke solutions, which has always been our strength. That differentiation, which is our claim, is that being somewhat different is, I think, something that we still very much pursue and count on.

22:38Mark Geoghegan: Then I think I mentioned our new unit that we established last year for cyber and digital business. That remains the dynamic growth area as well. I guess it's fair to say, you know, the industry still needs better solutions for dealing with this systemic accumulation risk, which hasn't been solved, but we're working on it and focusing our knowledge in that group has been.

23:02Clemens Jungsthöfel: You're more comfortable now than you were before a lot of work has been done on what's the ultimate what's the worst case scenario what's the big event are you more comfortable now about whether that event would be defined well and it would be something you can really put in a box and know exactly what your downside is going to be and i suppose ultimately that's the thing that would keep you awake at night as a big reinsurer yeah

23:24Mark Geoghegan: it's a learning journey we are on that journey we are on that curve we are not there yet i suppose

23:30Clemens Jungsthöfel: a lot of those are the downside is finite because i think the sort of aggregate stop loss and those kind of structures, aren't they? So you know exactly what is the worst thing that can happen. But that's more on the limit side, but not on the actual risk side, I suppose it's so dynamic. Again, it's because of agentic AI, of course, has become a different problem, perhaps.

23:48Mark Geoghegan: Exactly. And AI is probably, and we might come to that mark later, but AI clearly is probably, from an insurance, reinsurance perspective, probably the cyber 10 years ago, where everyone was trying to get their heads around what's the risk, what's the accumulation risk, what's the peril, et cetera. But again, that still is, I think, a very dynamic area where we see growth opportunities, then specialty lines, agriculture, credit surety, facultative business also remain growth areas for us. And then NADCAT, of course, wherever prices are appropriate, we are still, I would say, relatively underweight in property cap compared to our global market share.

24:27Mark Geoghegan: So we We have used the hard market years to work on this gap by growing stronger in property cat as we grew in general. And we also completed our ILS toolbox, as mentioned, with establishing Hanoveri Capital Partners. So this starting point may allow us to continue to grow in selective countries, parallel combination, even in a more challenging market environment.

24:51Clemens Jungsthöfel: Obviously, we've had a summer of terrible wildfires all across Western Europe. Do you think there's going to be a greater demand there? It's difficult, of course, because a lot of those countries have got state schemes and longstanding state schemes in France and Spain, particularly. But obviously, UK, again, we wouldn't expect the UK to be a wildfire territory. And of course, we've had some losses. We don't know how expensive they're going to be yet. But when you can see them on the news and you see houses on fire in England, things that you don't generally expect to see, do you think there might be more demand?

25:18Mark Geoghegan: Yeah, I think so. I mean, that comes back to our comments on the secondary perils. And it's very, very obvious, Mark, that that is changing, that we're doing, of course, damage to the planet, that climate change is visible every day. And then it comes down to insured losses versus economic losses. But there's clearly a need to address those issues from an insurance and reinsurance perspective, but also coming up with prevention measures. I think combining that is clearly something that we need to address.

25:49Clemens Jungsthöfel: Time to talk about AI. We're another year on, and experimentation and different use cases and new business models emerging. What are you finding? Which use cases are emerging as the most beneficial in the reinsurance value chain?

26:03Mark Geoghegan: Yeah, big topic, Mark. And it's a very headline-grabbing topic, of course, AI. I mean, for us, automation in general of our processes, and I think you spoke about that last time, is going very well. we do see AI more not as a standalone strategy or roadmap. It's more as an integral part of our digital journey, as we call it, and our automation journey. And the reason for that is, which is something that is often completely underestimated because it's so tempting to talk about these fancy lighthouse use cases. You know, they are so cool, sexy, they look so great on slides, and if you present them, et cetera.

26:40Mark Geoghegan: And I also have that debate with our clients. I think the leverage that comes with AI, you can only utilize if you have done your foundational work, which means really getting your data right, your infrastructure, your software, et cetera. Without that foundational work, AI is not really doing the trick. So therefore, that's really something we have focused on over the last couple of years. We are working diligently on that. But I do believe we, and I'm happy to say that, you know, with the PewDiePie reinsurance model, we don't have to deal with too much legacy, you know, that stuff, all that IT systems, fragmented IT systems that come with legacy, with M &A, etc.

27:20Mark Geoghegan: So we have a fairly harmonized system and software landscape. we've just migrated our last subsidiary on our current re-insurance platform and modernizing and applying AI automation on a harmonized platform is just so much easier and therefore I think we're making quite progress on AI in general it's fair to say that we stick to our let's say panoramic pragmatic approach to it we try to be a smart adopter of AI and really keeping our people at the center of it.

27:53Clemens Jungsthöfel: Now we're getting to the point where there's a lot more implementation. It's not just experimentation. What sort of productivity gains are you able to get? I mean, how much time can you free up for the average underwriter to spend more time with the clients and then with the brokers?

28:05Mark Geoghegan: That's the ultimate question. And to be honest, Mark, don't expect too much from me. I don't have a number. But even if I were to say X, Y, that number, the question is always how much of that in the numbers that you see are usually efficiency gains. You're perfectly right and say, what's the productivity gain? ultimately that comes with it. So how much time can you free up? I think we need to be mindful of the question, how much of that efficiency gains are ultimately turned into productivity gains and are really used to write more business, to be honest, because I like it to see much more that way than that efficiency play.

28:41Mark Geoghegan: It's not really exciting to say you're more efficient, your cost ratio goes down, et cetera. I would love to say in five years from now, That growth, we wouldn't have been able to do without AI. I think that's a much more appealing sort of way to look at it.

28:55Clemens Jungsthöfel: And what about the skill question? And obviously, do you think you can use AI to make you a better underwriter, i.e. to have a lower loss ratio on average, or be able to pick those better risks, risks that are less likely to have losses? Yes. and get a bigger share of those, how much of the ultimate gain, the profitability gain that you get after the productivity gain, will be down to an increased skill in underwriting due to AI?

29:19Mark Geoghegan: Yes, I firmly believe so. I think the focus, and we have shifted, we have very much focused on our processes, etc., back office, but also front office, data ingestion and all that sort of stuff. And AI has really helped us to increase our automation level. But ultimately, I would love to see more on the loss ratio part of the equation. But having said this, I think you can never replace the experience, the human touch, the client relationship of an underwriter with AI. I firmly believe that the human touch to the business, particularly on reinsurance, I think cannot be replaced. Having said this, I like to look at this as, let's say a joint venture, an underwriter using AI to help him make better and informed decision.

30:02Mark Geoghegan: And that works. And we see it here and there in our private lives, where you have an expert coming in, doing whatever, installing a light bulb in your home, and just using a chatbot AI to help. But you can tell the experience cannot be replaced.

30:17Clemens Jungsthöfel: What about AI as an emerging casualty peril? It's quite an interesting time at the moment. I remember I was a liability broker around the time of Y2K, and it was one of those sort of philosophical questions. And I don't think the industry did particularly well around Y2K. Of course, I remember having large electricity utility clients filling in huge proposal forms saying they'd basically solved the problem. They didn't have a problem. And then they end up having Y2K losses excluded from that renewal anyway. And it was a bit of a mess. Where do you think we are? We're hearing reports of AI exclusions appearing in casualty wordings.

30:51Clemens Jungsthöfel: What do you think is going to happen? I've spoken to other people, people who are at the cutting edge of this, and there are different views. One of the most recent people on the podcast said, you can't exclude AI because it's going to be too embedded in everything we already do. So it wouldn't be workable to exclude AI, for example. But others are more the other way to say, well, actually, you know, you could easily, it could emerge like cyber. We could become an exclusion. And then it would have to be an affirmative standalone new class of business. Where do you stand on this? Obviously, you have a very important role to play in this because if you took a hard stand one way or another, it could affect the market.

31:23Mark Geoghegan: Yeah, I think, Mark, you started it with the right perspective. Every innovation creates a new opportunity, of course.

31:30Clemens Jungsthöfel: And of course, in insurance terms, it always creates a temptation to exclude it. Which I always think is a temptation we should try to resist. But then I used to be a broker, so it's not my money, you know.

31:45Mark Geoghegan: You know, my first job was with an insurance agent. And he worked for an insurance company that was very risk averse. he always said we like to ensure stones against fire in the water but no i i think it's important that we stay again part of the solution that we come up with solutions etc but having said this you know with this new opportunity also of course comes a new risk and we just need to understand that risk well if you just compare that well you know when humanity invented the airplane it also created the risk of an aviation accident so you always create the peril itself with the innovation So we need to be mindful to understand that.

32:23Mark Geoghegan: I think the industry is still developing a better understanding of AI-related exposures and also the accumulation risk that comes with it. So again, I think we do follow a bit of a similar path probably than cyber 10 years ago when it comes to AI. So trying to understand. But clearly the development is so dynamic and so fast. It's a challenge to stay on top of things. So I guess the biggest risk today is not necessarily the AI risk that we see right now. The question is really about accumulation. Can we quantify it, etc.? And then, of course, the governance risk that emerges when humans stop challenging machine outputs and all that, etc.

33:07Mark Geoghegan: So in terms of exclusion, again, ultimately, I guess it will be a line of business in itself.

33:14Clemens Jungsthöfel: I suppose because it is an industry in itself that at least there will be a specific insurance product for those, i.e. the manufacturers of AI and the prime resellers of AI, you know, the people that, you know, that have the anthropic that creates the Claude and then they have someone who takes Claude and then applies it to the insurance industry, for example. Those people, I suppose, they might need specific insurance products. Yeah. Do you think, is it the sort of thing that we'll end up with a general liability exclusion, a bit like we have with, you know, with nuclear or war?

33:44Mark Geoghegan: I can't see that yet, but I think it's the right question to ask because AI is not, It's a bit like cyber, you know, AI liability is not one risk. It's a collection of risk that can manifest differently across industry. And to your point, I mean, responsibilities at this point can become quite blurred. If an AI-assisted action causes loss, I mean, who is liable?

34:07Clemens Jungsthöfel: Yeah, and even if you had excluded it, you'd say, well, how can I prove that the exclusion applies here? Because it's very difficult to tell who's ultimately responsible. And of course, again, I'm pretty sure when you read your user license of whatever IE you're using, it pretty much exonerates itself from any liability, I'm sure. Well, that's the contractual wording they're going to be using. So again, you know, it's going to be something if you use at your own risk anyway.

34:30Mark Geoghegan: Yes. So overall, again, I think, Mark, trying to better understand it, try to price it, try to come up with pieces, etc. I mean, even if you see some exclusions here and there, I think we should start to do more underwriting for AI within any risk we cover and expect silent.

34:48Clemens Jungsthöfel: I suppose the paradox will be that, of course, you know, as AI gets better and is improving itself, learning from its mistakes, unlike the way that humans tend to forget, we forget our mistakes after 10 or 15 years and we think we've got better. I suppose we'll end up wanting to be excluding humans. We'll exclude the humans because they're the ones who cause all the losses, whereas, you know, the AI is actually running on really nice. So if it does make a mistake, it fixes it. So we never know. If we think of them as humans who are just slightly better at learning than us, it's probably the right way of doing it.

35:18Clemens Jungsthöfel: And anyway, just to summarize what you've been saying, it sounds like, well, you're being typically pragmatic about it because it sounds like it's far too early to say. And of course, if there were billions of dollars of losses flaring up every two days, then we're probably having a very different conversation right now.

35:34Mark Geoghegan: Yes. So observing it, staying on top of it, etc. And really try to be part of the solution. And not say, well, let's try to exclude it wherever we can and run away from the risk is not what we should do as an industry.

35:46Clemens Jungsthöfel: Ultimately, it's there and it's not going to go. The one thing we do know is it's not going to go away. So we probably should try and grapple with it like the airplane. It's not going away. It's not some passing fad. It's going to be here. So we should, if we want to stay relevant in that world, we need to find a way of making it fit in. 100 % agreed.

36:04Mark Geoghegan: And the speed of that development of AI is breathtaking, as we all know. So we better live with it and be part of the solution.

36:12Clemens Jungsthöfel: apologies for jumping around but i was getting near the end of my list of questions and there's one that i realized i'd forgotten to ask i jumped over again and apologies for this because i think i probably i've asked you and all your predecessors this question every year in terms of we have another year's data on the u.s casualty market what's that data telling us and is it making you feel more comfortable or less and how's that affecting your appetite and your attitude towards

36:36Mark Geoghegan: that obviously which is a huge market no apologies needed at all we should talk about it every year it's the day job well and we talk to our clients and brokers frequently on this look i mean our view of the market generally has not materially changed i mean social inflation the legal environment is still a major topic in u.s casualty business let's not fool ourselves It does drive claims costs through litigation activity that has not fundamentally changed. It is, I think, fair to say that recent rate developments and also the limit management, etc., has been encouraging. So the question is, those pricing developments, etc., do they keep up with future loss trends?

37:26Mark Geoghegan: So that's, I think, the ultimate questions. Therefore, we think there is a need for a rate development, at least in line with lost cost trends. And the deployment of limits needs to stay disciplined to avoid volatility from single large verdicts that we still see. For me, the question is, can you address a topic that is so systemic in that sense with that litigation environment by way of managing rates, prices and limits, etc.? So that's the ultimate question. So from today's point of view, it looks like discipline is mostly holding. And our long-term partnership here, also in this space, once again, show a lot of value for both us and our partners.

38:13Mark Geoghegan: However, in case the market dynamics should change negatively, we would certainly also start managing the cycle here.

38:20Clemens Jungsthöfel: And the answer to that question in most cases is that in most cases, those rates are keeping up with the loss trends, would you say?

38:27Mark Geoghegan: It's too early to say. I mean, there's still a lot of distortion of the data, etc., in the underlying triangles, etc. I think we do get more comfortable here and there, but I do believe we still need more experience and more data to really say, particularly if the recent underwriting years do really hold up.

38:44Clemens Jungsthöfel: And one of the other questions that I should have said this when we were talking about growth opportunities, obviously the final lever for growth is M &A. Everyone has plenty of capital that they could deploy on buying other insurers. Do you think that's a lever that's likely to be deployed more as time goes on this year?

39:02Mark Geoghegan: Yeah, I mean, generally in the market, we do see a lot of M &A activity on the primary space, very, very busy. So we do see that when it comes to the reinsurance space, or particularly to Hanoveri. I mean, I just quote what my investment bankers always say, Clemens, you're so boring. I mean, I can't do business with you on M &A. So why is that? Well, look, I wouldn't rule it out. But of course, we do benchmark M &A, any potential M &A and the valuations, et cetera, with what do we get for an acquisition? You know, do we get teams, knowledge and the business itself? But then you have to look at it, you know, how large is that business, you know, once I've completed the transaction?

39:42Mark Geoghegan: And, you know, what's the cost of complexity that you also acquire versus organic scenarios? And therefore, I think the organic growth has served us on the PNC Re side quite well. That might look different here and there on a life and health reinsurance site. So I wouldn't rule it out either. But generally, as long as we can grow organically, which I'm very optimistic about, there is no need for us and actually no value in us to do the M &A.

40:11Clemens Jungsthöfel: I suppose there's a cultural question. You are quite different. So you're likely to encounter cultural differences if you acquire, particularly something of a reasonable scale.

40:20Mark Geoghegan: Yeah, absolutely. Absolutely. that complexity cost you know well if the people we acquire you know the teams we acquire are so cost-conscious than we are in Hannover then fine no no I think it's a very distinct culture that speedboat mentality that pragmatism is something that you can easily lose it's hard to replicate but you can easily lose it so therefore it's very precious and it's very dear to my heart

40:43Clemens Jungsthöfel: any other final messages I suppose to your customers and to your brokers as we come into Monte Carlo as we come into this autumnal renewal season once again?

40:53Mark Geoghegan: So generally to our clients and brokers clearly you can expect consistency from Hanover E. This is really dear to our heart this long-term partnership approach I think is really something that is important particularly in these difficult market environments you know having a long-term view. Grow with our clients so that pragmatism, solution orientation. We always try to be there, that empowerment concept. Don't expect any changes on that from Hannover Lee. What we didn't mention, if I may, Mark, we have our next strategy being presented at the investor state at the end of November. I think it's 25th of November.

41:32Mark Geoghegan: So the new strategy cycle, 2027 to 2029, that's probably one topic we didn't talk about any sneak previews there available or well we have to wait till november yeah oh absolutely yeah don't don't expect a revolution but i don't want to spoil it but but look i think we invested heavily in the more recent strategy cycle in the foundations to make us all ready future ready to tackle the growth opportunities we're very optimistic we're very deliberately addressing sort of the growth in our business but clearly focusing on profitability the digital journey is something, you know, so AI automation, something that will be at the core.

42:09Mark Geoghegan: But ultimately, you will see Hanavari continue to be Hanavari, to be somewhat different. That's for sure.

42:17Clemens Jungsthöfel: Actually, I had Clyde Bernstein of Aon, who's responsible for implementing the technology on the insurance side, on the global syndicated risk side, obviously a lot of London market stuff. What do you think about this potential for an agentic AI broking operation being matched by agentic AI reinsurance operation for standard more vanilla type business. But I mean, part of the problem, of course, with reinsurance is nothing really is that standard or that vanilla. We can see that happening in insurance, obviously on the lower value commercial. Do you think that will ever get any traction for that kind of middle market, more standard follow market kind of, hey, do you want this yes or no type stuff?

42:57Clemens Jungsthöfel: Or does it not really make much difference because the number of transactions in insurance is still so small, it doesn't really matter. Of course, there's the other one where you are unpacking your appetite and giving it to the broker so that the broker can immediately place something that's fairly vanilla.

43:12Mark Geoghegan: Yeah, I think there will be ultimately an underwriting decision coming from a human. I think that will not be replaced, but helping to get rid of some of the cumbersome work, which I had to do in my first couple of years as an insurance agent. I mean, I would have loved to replace that and focus more on that underwriting decision. So for me, it's more you know helping to get rid of some of the manual work that is involved in that i mean if we look at the reinsurance space it's clearly facultative business where which is much closer from a transaction point of view to commercial business so that's clearly an area where ai agendic ai can play a role but more in terms of helping underwriters and i suppose to get that

43:52Clemens Jungsthöfel: quote back really quickly in a matter of minutes rather than days yes again in a market like fact increasing your hit rate is important and helpful speed is also important in fact isn't it yes

44:05Mark Geoghegan: absolutely and if you look at the numbers of submissions that you get per year that clearly

44:09Clemens Jungsthöfel: helps it's good to hear that there'll be some applications but probably you know for your really big annual treaty renewals it doesn't seem appropriate necessarily we'll still be uh having a nice coffee and maybe a drink or two in monte carlo and then baden baden and you know pci and

44:25Mark Geoghegan: everywhere else but before we sign anything well for now i think that served us quite well and again that human interaction mark and i can only reiterate that i think that cannot replace by anything and i say that from sitting together with our clients and brokers etc trust cannot replaced by ai not by an agent or whatever and i think we need trust particularly more challenging market environments and i say that you know and we spoke about that last time because i grew up with insurance at home. And I think that's an element that cannot be replaced. And I don't think that will ever be replaced.

45:00Mark Geoghegan: And I'm not saying that because I would love to be that way, but I think it's really something we need to be aware of.

45:06Clemens Jungsthöfel: Absolutely. I absolutely agree with you in that insurance agency. I'm sitting in Spain and buying insurance for my flat here in Spain. It's great to go to the local agent. Every town's got them. And it's nice to know that you can physically go there. If I had a claim, I could physically sit outside his office until the claim was paid if you see what i mean i feel reassured and also but those people are very professional they're well trained as well they're far better to talk to than someone in a call center

45:32Mark Geoghegan: it makes a difference mark and i and again i say this because we had insurance at home at the kitchen table literally and if you see that every day how people you know are desperate with some of the claims or run into a problem and then they want to talk to a human being and not to a chat bot or whatever that's not going to change so clemens hopefully i bump into you down in monte

45:53Clemens Jungsthöfel: color if not you may well be too busy so until hopefully this time next year at the very least thank you very much for coming on the show and hope to speak to you again absolutely mark and

46:03Mark Geoghegan: if i may squeeze in a last thought on it because we spoke about when i started this podcast i feel a bit bad you know with a very blurred view on the world and all that etc so just to leave the podcast on a positive note and you know i'm a hobby pilot i love flying analogies so because we spoke so much about headwinds in this environment. I just want to reiterate, and I said it actually to our colleagues recently, headwinds are not always the enemy. In fact, and as a pilot, you know this, it's the headwinds that help an aircraft to take off. Give you a lift, yeah. Yeah. And in the reinsurance, I'd say, and particularly for Hanover, really challenging markets often create the conditions for our strongest performance.

46:47Mark Geoghegan: And I was just talking to an analyst and said, well, Clemens, you guys have questions. quite a track record of strong underwriting returns in soft cycles. So I was sitting with our PNC underwriters last week and I said, guys, headwinds are not a reason to stay on the ground. So on the contrary, this is a Hanoveri market. So let's get on a plane and see our clients and have our clients and business partners to steer that environment. I just want to leave the podcast on that positive note.

47:14Clemens Jungsthöfel: Yes, and I'd have to say for anyone listening, Clemens has got a big smile on his face as he's saying that. So it's good to see and speak to you soon. Speak soon, Mark. Thank you again. Thank you very much.

47:51Clemens Jungsthöfel: where you, the listener, are right in the room with me and the interview subjects. Needless to say, that means it's a great way of getting your message out directly to an audience because you know you've got their full attention. It's also very cost effective. So get in touch with Mark at thevoiceofinsurance.com to find out how you could be speaking directly to the industry. The Voice of Insurance podcast is produced in association with Advantage Go, enabling enterprise-scale underwriting through a single pane of glass.