Total capital dedicated to the global reinsurance industry measured US$605 billion at year-end 2019, reflecting robust 15 per cent year-on-year growth.This was primarily driven by 2019’s strong investment market performance and was achieved despite a 3 per cent contraction in alternative capital, according to the latest Reinsurance Market Report from Willis Re.
Year-to-date 2020, much of this expansion will have unwound, due to the steep sell-off in equity and corporate bond markets. The significant swings in investment markets in March and April 2020 have resulted in year-to-date impacts to the global reinsurance capital base ranging from 5 per cent to as much as 20 per cent.
Willis Re conducts a more in-depth analysis on a subset1 of 18 reinsurers. The reported 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 per cent in 2018 to 3.2 per cent. 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. The reported combined ratio increased from 99.2 per cent to 100.6 per cent. On an underlying basis, ie,normalising catastrophe losses and excluding prior year reserve development, it rose from 102.3 eper cent in 2018 to 103.1 per cent. This metric has also been increasing every year going back to 2013.
James Kent, global CEO, Willis Re, said: “This analysis demonstrates how sensitive the global reinsurance capital base is to investment markets. 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. 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.”
Earlier,Aon’s Reinsurance Aggregate (ARA) report, which tracked the financial performance of 23 leading reinsurance carriers over the year.had said global reinsurer capital rose by 7% to $625 billion in 2019, according to
Traditional capital rose 9% to $530 billion, while alternative capital was down by 2% to $95 billion at the end of 2019.The rise in traditional capital was driven mainly by strong investment performance as stock markets rebounded and interest rate cuts that resulted in unrealised gains on bond portfolios.