Reinsurance non-life

Market overview

Global non-life reinsurance premiums in 2017 totalled about USD 170 billion, around 27% of which was attributable to 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

Global premiums in non-life reinsurance are estimated to have grown by 3% in 2017 in real terms, based on rapidly increasing cessions from emerging markets.

After five quiet years with low natural catastrophe losses, the global non-life reinsurance industry is facing heavy losses from the hurricane season in the Caribbean and the US in 2017. The season´s three major storms – Harvey, Irma and Maria – alone are estimated to have caused significant insured losses. The combined ratio for 2017 is estimated to be around 110%, with most of the increase due to the hurricane losses, as well as a number of other natural catastrophes including Cyclone Debbie in Australia, earthquakes in Mexico, and wildfires in California and Southern Europe. Accordingly, overall global industry profitability as measured by return on equity (ROE) for the full-year is estimated to come in at around 1%. Apart from the unusually high burden from natural catastrophes, the reinsurance industry has also continued to suffer from the ongoing low interest rate environment and the overall softening of underwriting conditions. Consequently, the industry ROE declined from around 15% between 2012 and 2014 to 11% in 2016. For the first six months of 2017, the industry ROE further dropped to 9%, based on a combined ratio of 93% and a return on investment (ROI) of 2.5%.

The soft underwriting conditions of recent years partly reflected benign claims developments, but were mostly a direct consequence of excess capital in the market. Reinsurance capacity was abundant due to the considerable influx of alternative capacity (AC). Since 2010, the size of AC more than tripled and was estimated to be around USD 79 billion in the first half of 2017. A significant amount of AC has been absorbed by the third-quarter hurricane losses, especially collateralised capacity in the retrocession market, and therefore will not be available as active capacity in the upcoming renewals season. Most of this capacity, however, was re-loaded through the injection of new capital from investors.

The capital position of global reinsurers was more or less stable over the recent years. Capital growth has been managed increasingly via dividend payments and share buy-back programmes, hence returning almost all of the industry´s net income to shareholders. Nevertheless, there was still some excess capital in traditional reinsurance by mid 2017, and this has been significantly reduced by the losses from hurricanes Harvey, Irma and Maria.

Outlook

The three major hurricane events of 2017 led to rate hardening for both for loss-affected accounts, and to a lesser extent for loss-free accounts at the January 2018 renewals. Capital abundance in traditional reinsurance has been reduced, and AC will require additional funds from investors to operate at the same level as before the hurricane losses.

In 2018, advanced markets non-life reinsurance premium growth will likely reflect a hardening of rates and slightly stronger nominal growth in the primary market. Demand should also be supported by new solvency regulations: non-life reinsurance has become more attractive for European insurers under Solvency II, since it better reflects the risk mitigating effect of reinsurance.