Total capital dedicated to the global reinsurance industry measured US$605 billion at year-end 2019, reflecting robust 15% year-on-year growth, according to Willis Re’s latest Reinsurance Market Report.
This was primarily driven by 2019’s strong investment market performance and was achieved despite a 3% contraction in alternative capital, said Willis Re, the reinsurance broking subsidiary of Willis Towers Watson.
Much of this expansion will have unwound in 2020, due to the steep sell-off in equity and corporate bond markets, said the report, noting that the significant swings in investment markets in March and April 2020 have resulted in year-to-date hits to the global reinsurance capital base ranging from –5% to as much as –20%.
In an in-depth analysis on a subset of 18 reinsurers, the report found that return on equity (RoE) for the subset increased significantly, from 4.2% in 2018 to 9.7% in 2019, driven by investment gains.
However, the underlying RoE, which excludes the impact of investment gains, abnormal catastrophe losses and prior-year reserve development, fell from an already low 4.3% in 2018 to 3.2%, the report continued. “The analysis shows that the reinsurance sector’s underlying RoE remains in gentle decline and is well below the industry’s cost of capital.”
A principal driver of the lower underlying RoE was the subset’s combined ratio, which increased from 99.2% to 100.6%. (Combined ratios above 100% indicate an underwriting loss.)
On an underlying basis, i.e., normalizing catastrophe losses and excluding prior year reserve development, it rose from 102.3% in 2018 to 103.1%. This metric has been increasing every year since 2013, said Willis Re.
“This analysis demonstrates how sensitive the global reinsurance capital base is to investment markets,” said James Kent, global CEO, Willis Re, in statement accompanying the report.
“Thankfully strong capital growth in 2019 allied to judicious investment strategies by many companies has put the industry in a good position to weather the current volatile environment,” he added. “At the same time, the analysis demonstrates that underlying profitability remains a core focus for reinsurers resulting in rate increases across many lines of business, to support the pricing momentum on loss impacted lines that started in some cases in mid-2018.”
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