Market size in USD billions
Estimated global premium income in 2013
Global non-life reinsurance premiums in 2013 totalled about USD 190 billion, approximately 25% of which came from ceding companies in emerging markets. In general, reinsurance demand depends on the size and capital resources of primary insurance companies, as well as on the risk profile of the insurance products provided.
The reinsurance industry exhibited solid premium growth of 4% in 2013. Industry underwriting results were mixed during 2013: a very good first quarter, with a low incidence of large losses and significant reserve releases, followed by a second quarter with high catastrophe losses from tornadoes in the US and floods in Germany, the Czech Republic and Canada. The third quarter, which is most exposed to North American hurricanes losses, was generally benign. Hailstorms in Germany, however, generated multi-billion dollar insurance losses. The widespread devastation caused by the tropical cyclones that battered Mexico, Eastern India and the Philippines was not reflected in the severity of reinsurance claims because of low insurance penetration in these markets. Preliminary data indicate a combined ratio of around 90% for 2013, reflecting a slightly below average natural catastrophe burden and continuing significant releases from prior-year loss reserves.
Estimated global premium growth in 2013
As with the primary insurance industry, the investment environment still poses challenges for reinsurance. The industry’s average annualised investment yield has declined to just 3%. The full-year industry RoE is expected to be around 12%, down from 14% in 2012.
The reinsurance industry’s capital base remains strong. Any contraction from mark-to-market losses on fixed income securities and dividend payments was largely offset by retained earnings. So-called “alternative capacity” continued to grow, reaching a total of about USD 45 billion at the end of 2013, representing roughly 11% of the global property catastrophe reinsurance market (see box below).
Significant pressure on reinsurance pricing and rising retentions of primary insurers were evident at the January 2014 renewals. Accordingly, premium growth is expected to slow down and, assuming average catastrophe losses, the reinsurance sector’s overall combined ratio is expected to rise to around 95% in 2014. The industry RoE will trend toward 9%.
Pension funds, hedge funds and others have been supplying an increasing share of capacity to the global natural catastrophe re/insurance market.
For these providers, catastrophe risk is a diversified asset class that has become relatively more attractive since the financial crisis, after which interest rates fell to historic lows.
Through insurance-linked securities and other form of collateralised reinsurance they complement the traditional capacity of re/insurance carriers in certain peak risk markets where margins are comparably high and entry barriers are low.
About 70% of alternative capital is concentrated on the US natural catastrophe market, mostly wind and some earthquake. Another 25% is allocated to the European catastrophe market. The remainder is in other markets and perils.
Alternative capital operates in commoditised markets and we believe it does not fundamentally threaten Swiss Re’s business model. Swiss Re is a knowledge company that offers tailored solutions, as well as a long track record of partnership and reliability to our clients.