Reinsurance non-life

Market overview

Global non-life reinsurance premiums in 2016 totalled about USD 160 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 performance

Non-life reinsurance premium growth was stagnant in US dollar terms. Revenue growth was strongly constrained by soft reinsurance market conditions and weak premium growth in the primary market (see above).

Reinsurance prices remained soft almost across the board. In general, rates in casualty have been more stable than in property and specialty lines.

In contrast, the industry saw a fifth year of strong, albeit lower, underwriting results amidst an absence of large natural catastrophe losses. Preliminary data indicate a combined ratio of around 93%–94% for 2016. 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 99% for 2016.

In the low-investment yield environment, underwriting results remain the main profit driver for non-life reinsurers. The industry achieved a meagre 3.5% in its average annualised investment yield in 2016. Nevertheless, based on the strong underwriting results, an overall ROE of around 9% was achieved for non-life reinsurance for 2016, down from 12% in 2015.

The reinsurance industry’s capital base remains strong. The capital position of global reinsurers, the traditional source of capital, grew by around 6% in 2016. The increase was almost entirely due to unrealised capital gains on investments, mainly associated with declines in interest rates during the period. Continued strong capital management returned almost all of the industry’s net income to shareholders.

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.

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 the end of 2016, aggregate AC amounted to USD 61 billion (excluding retrocession), equivalent to an 18% share of the global property catastrophe market. In the broader context of the overall non-life reinsurance market, however, the market share of AC is less than 2%.

Outlook

Real premium growth in the non-life reinsurance sector is expected to increase in 2017, based on higher cessions from emerging markets. Advanced markets’ premium growth will reflect a moderation in rate pressures and slowing growth in the primary market. Demand will likely be supported by new and stronger solvency regulations.

Given the strong erosion of profit margins over the last two years, property catastrophe reinsurance rates are close to bottoming out. The softening of average rates is expected to moderate across all lines of business.