Total capital dedicated to the global reinsurance industry was USD 587 billion at 30 June 2020, reflecting a 3% decline since year-end 2019, according to the latest Reinsurance Market Report from Willis Re, the reinsurance business of leading global advisory, broking and solutions company Willis Towers Watson.

The half-year figure masks an approximate fall of 30% up to late-March, following the impact of COVID-19 on investment markets. That deficit was largely restored in the following months. Total capital remains 12% higher than at the end of 2018, suggesting that, based on current investment market levels, COVID-19 has not been a capital event for the industry.

Willis Re conducts a more in-depth analysis of a Subset1 of 18 reinsurers. The Subset’s combined ratio worsened from 94.9% in the first half of 2019 to 104.1%, due to COVID-19 losses which added 11.1 percentage points to combined ratios on average. However, on an underlying basis i.e. normalising COVID-19 and catastrophe losses and excluding prior year reserve development, the combined ratio improved from 100.5% to 98.6%.

While underlying underwriting performance improved, it did not improve enough to boost return on equity (RoE). While the reported RoE for the Subset companies fell to negative 0.7%, the underlying RoE also fell, from an already low 4.2% in the first half of 2019 to 2.7%. The driver was a drop in investment yield, which more than offset the improved underlying combined ratios. Whichever way one measures RoE, it remains well below the industry’s cost of capital of roughly 7-8%.

James Kent, Global CEO, Willis Re, said: “This half-year analysis shows a reinsurance market understandably in a state of change. While reinsurers have so far resiliently shouldered the combined effects of COVID-19 losses and investment market volatility, underlying profitability remains challenging. Uncertainty therefore remains, particularly over the potential impact of COVID-19 on long-tail lines, which is driving reinsurers to deliver additional improvement in underwriting returns. We expect to see further reinsurance market discipline as well as continued differentiation between regions and clients based on past performance and underlying risk.”