Reinsurers Robust as Returns Come Under Pressure

Reinsurance capacity has risen 15% year on year, however the turmoil in the global economy has the potential to impact returns.

Willis Re has issued its latest Reinsurance Market Report which found total capital dedicated to the global reinsurance industry measured US$605 billion at year-end 2019.

The report said the15% increase was primarily driven by 2019’s strong investment market performance and was achieved despite a 3% contraction in alternative capital.

However, it added that year-to-date in 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% to as much as –20%,” added the report.

Willis Re conducted a more in-depth analysis on a subset 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% in 2018 to 3.2%. The analysis shows that the reinsurance sector’s underlying RoE remains in gentle decline and is well below the industry’s cost of capital.

James Kent, Global CEO, Willis Re, (pic) 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.”