Global reinsurers saw robust capital growth in 2019, although underlying returns remained low, according to the latest Reinsurance Market Report from Willis Re.
Total capital dedicated to the global reinsurance sector was US$605 billion at the end of 2019, reflecting year-over-year growth of 15%. The growth was driven primarily by 2019’s strong investment market performance, and was achieved despite a 3% contraction in alternative capital, Willis Re reported.
Much of this expansion will have unwound by now due to the steep sell-off in the equity and corporate bond markets, Willis Re said. The swings in investment markets in March and April have resulted in impacts to the global reinsurance capital base ranging from -5% to as much as -20%.
For its report, Willis Re conducted a more in-depth analysis on a subset of 18 reinsurers. The reported return on equity (RoE) for the subset saw a significant year-on-year increase, 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 4.3% in 2018 to 3.2%. Willis Re’s analysis found 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,” Willis Re said. “The reported combined ratio increased from 99.2% to 100.6%. 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 also been increasing every year going back to 2013.”
“This analysis demonstrates how sensitive the global reinsurance capital base is to investment markets,” said James Kent, global CEO of Willis Re. “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.”
