Market overview

Global non-life reinsurance premiums in 2012 totalled about USD 180 billion, 25% 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 performance

Aside from the financial crisis and the soft underwriting cycle, natural catastrophes are leaving the most substantial mark on earnings for the reinsurance sector. In the first three quarters of 2012, the global reinsurance industry enjoyed a good, though not strong, performance. The fourth quarter, however, saw multi-billion-dollar claims from Hurricane Sandy. Based on currently available information, we estimate a combined ratio of below 95% for the reinsurance industry in 2012, an improvement over 2011 with 110%, but in the same range as the 96% combined ratio in 2010.

Nevertheless, underwriting profitability in reinsurance markets held up better than in many primary markets. The industry still benefits from the hard market years of 2002 and 2003, and from the more benign claims of the 2009 and 2010 recession years. Releases from loss reserves in prior years are currently helping to improve underwriting results.

Like primary insurers, reinsurers have suffered from the eurozone debt crisis, low interest rates and weak equity markets. Their investment income is down this year. Squeezed from underwriting and investment, their overall profitability was also down: most expect a return on equity of above 10% for the full year, up from 4% in 2011.

The reinsurers’ capital base remains strong, but capital requirements have increased due to hikes in risk charges associated with reserves, higher modelled exposures to natural catastrophes, and riskier assets. Additional uncertainties relate to Solvency II requirements which are also likely to raise capital requirements further.

Outlook

2013 renewals are expected to be stable to slightly firmer. Significant hardening is expected to be limited to lines and segments that have recently experienced high losses.

Assuming average catastrophe losses, we expect the combined ratio to be around 97% in 2013. This estimate is based on a scenario that assumes a moderate rate increase, a less benign claims environment than the last three years and declining reserve releases. The overall profitability outlook for 2013 and 2014 is moderate: we expect an average return on equity for the reinsurance industry of 8% to 9%.