Global Reinsurance Sector's Trajectory Is Stable

Willis Re 2019 Midyear Report: Global Reinsurance

Total capital dedicated to the global reinsurance industry was $559 billion mid-year 2019 according to Willis Re's latest Reinsurance Market Report. This represents an 8 percent increase from $518 billion at the end of 2018. Willis Re said that the main driver for the industry's capital growth was strong investment markets.

The bulk of the figure is represented by 36 reinsurance companies tracked in the Willis Reinsurance Index, which was up 11 percent to $440 billion, a reversal of the trend noted in Willis Re's year-end 2018 Reinsurance Market Report. In particular, Willis said the fresh capital backing the Convex start-up also contributed to the capital growth during the first half of 2019.

Willis Re also undertook a more in-depth analysis on a subset of reinsurers within the Index that makes the relevant disclosure of natural catastrophe (nat cat) losses and prior-year reserve releases. The reported return on equity (RoE) for this subset jumped to 13.9 percent from 8.5 percent at half-year 2018, driven by strong investment gains. Excluding investment gains, which had only a minor impact in half-year 2018, the RoE was 7.3 percent.

Normalizing for nat-cat losses and removing the benefit from reserve releases results in an underlying RoE of 10.8 percent, or 4.2 percent excluding investment gains. This latter figure is a small improvement on half-year 2018's 3.9 percent underlying RoE, or 3.3 percent excluding investment gains.

The subset's combined ratio deteriorated from 93.3 percent in half-year 2018 to 94.9 percent on a reported basis. Willis Re said this was entirely attributable to a lower pace of reserve releases and higher nat-cat activity. Stripping out prior-year development and replacing actual nat cats with a normalized level, Willis puts the underlying combined ratio at 100.5 percent—an improvement on half-year 2018's 101.5 percent.

James Kent, Global CEO, Willis Re, said, "Looking behind the headline figures reveals a positive direction of travel for reinsurers so far this year, with modest but important reductions in non-catastrophe combined and expense ratios. This improvement is supported by the positive trajectory seen in 2019 market pricing across many lines. The slowdown in reserve releases continues, however, so in the months and years ahead reinsurers will need to further realize these trends."

Fitch Ratings 2020 Outlook: Global Reinsurance

According to Fitch Ratings, the outlook for the global reinsurance sector in 2020 is stable. This reflects Fitch's expectation that premium rates will continue to edge up, but profitability will remain subdued, with risk-adjusted prices still low by historical standards and low investment yields persisting amid a weak global economic outlook. The sector's credit profile is supported by very strong capital adequacy, robust risk management, and generally solid business profiles, Fitch said.

Reinsurance price rises have gathered momentum in 2019 following 2 consecutive years of significant catastrophe losses, and terms and conditions are starting to tighten. The improved pricing is being driven mainly by rising prices in the primary insurance markets after several large global insurers repositioned their portfolios and Lloyd's of London carried out a market-wide review of profitability at its syndicates.

Fitch expects the slowdown in the influx of alternative capital to the sector, one that has driven the growth of the insurance-linked securities market, to continue. The slowdown is due, in part, to investors' growing uncertainty about the impact of climate change on insurance claims. There is mounting evidence that climate change is affecting insurance claims, with 2 successive years of record wildfire losses, and warmer temperatures in recent years are a likely contributory factor to increased hurricane and flood losses.

Alternative capital from investors looking to diversify away from traditional financial markets has added to overcapacity, to the detriment of reinsurers' margins. A lasting slowdown could reduce competitive pressure and help to support pricing momentum according to Fitch.