Global non-life reinsurance premiums in 2015 totalled about USD 170 billion, 26% of which stemmed from ceding companies in emerging markets. In general, reinsurance demand is a function of the size and capital resources of primary insurance companies, as well as of the risk profile of the insurance products provided.
Market size in USD billions
Estimated global premium income in 2015
Estimated global premium growth in 2015
Non-life reinsurance premium growth was about -5% in US dollar terms, impacted mainly by adverse currency developments. However even in real terms, revenue growth was strongly limited by soft reinsurance market conditions and weak premium growth in the primary market (see above).Reinsurance prices have been softening since US property catastrophe rates started to weaken in mid-2013. This trend has since spilled over into other lines of business. In general, rates in casualty have been more stable than in property.
In contrast, the industry saw a fourth year of strong underwriting results amidst an absence of large natural catastrophe losses. Preliminary data indicate a combined ratio of around 90% for 2015. However, this does not reflect underlying underwriting profitability, because natural catastrophe losses have been lower than anticipated and the claims ratio has been reduced by positive reserve releases from redundant reserves for prior years’ claims.3 Excluding these factors, the underlying combined ratio would be around 100% for 2015.
The investment environment for reinsurers is the same as it is for insurers: challenging. The industry achieved a mere 3% in its average annualised investment yield in 2015, down from 2014. Nevertheless, based on the strong underwriting results, an overall ROE of around 13% was achieved for non-life reinsurance for 2015. Adjusted for the special factors that boost the underwriting result such as low natural catastrophe losses and reserve releases, the average ROE would be around 6%-7%.
The reinsurance industry’s capital base remains strong. The capital position of global reinsurers, the traditional source of capital, weakened by 6% in the first half of 2015. The main reasons were currency fluctuations, which contributed to a decline in US dollar-denominated reinsurance capital, continued strong capital management, which returned much of the industry’s net income to shareholders, and unrealised capital losses on bond and equity portfolios. Comparing capital and premium developments in non-life reinsurance shows that premiums — as a proxy for insured exposures — have roughly traced capital development since 2009. Capital growth has been managed increasingly via dividend payments and share buy-back programmes in recent years.
One important source of capital in the non-life reinsurance segment and a contributor to the softening of the market has been the expansion of alternative capacity (AC) into the peak risk segment of the industry. By end of 2015, aggregate capacity of AC amounted to USD 65–70 billion, equivalent to a 16% share of the global property catastrophe market. However, after three years of rapid expansion, the development of AC moderated, as risk spreads declined in parallel with the softening of rates in the traditional sector.
Real premium growth in the non-life reinsurance sector is expected to weaken in 2016. Mature markets are expected to be impacted by the current rate softening. In the emerging markets (with the exception of China), premium growth is expected to improve on the back of macroeconomic recovery, particularly in Latin America. In China, reinsurance demand is expected to decline following the introduction of C-ROSS, its new solvency regime. For 2017, a recovery of the growth trend is expected, driven by stronger sales in primary insurance in all regions.
Given the strong erosion of profit margins over the last two years, property catastrophe reinsurance rates are close to bottoming out. Across lines of business, the softening of average rates is expected to moderate. For casualty and specialty lines, significant differences in pricing developments by market and line of business are expected.
3 Claims reserve releases lower the amount of claims incurred which are booked in a certain financial year, thus positively impacting underwriting results and net income. Claims reserve additions add to the reported claims burden in a financial year, with the opposite effect on the P&L. For a more detailed discussion, see also http://media.swissre.com/documents/sigma4_2014_en.pdf