Dedicated, global reinsurance capital increased by 5.3% to a record high of $595 billion over the nine months to September 30th, 2016 and, overall, demand for reinsurance protection increased during the period, according to reinsurance broker Aon Benfield.
Traditional reinsurance capital increased by 4.7% over the nine months to September 30th, 2016 to $517 billion, amounting to approximately 87% of total reinsurance capacity. Of the $595 billion Aon Benfield states that alternative reinsurance capital makes up $78 billion, or roughly 13%, which translates to growth of 9.6% over the nine months to September 30th, 2016.
The 5.3% growth of overall reinsurance capacity to $595 billion takes the marketplace to a new high, and is a reversal of the trend witnessed a year earlier, when full-year 2015 global reinsurance capital fell by 2% to $565 billion, when compared with the previous year.
The chart below, provided by Aon Benfield in its January 2017 Reinsurance Market Outlook, shows that total reinsurance capital has declined year-on-year in just three of the last ten years, reaching a new high in 2016.
While alternative reinsurance capital continues to expand, increasing its share of overall reinsurance capital to 13% over the nine months to September 30th, 2016, Aon Benfield explains that the 9.6% growth reported from the end of 2015, is actually the smallest growth the sector has reported in five years.
“This result further suggest that traditional capacity is using all the tools at its disposal in order to stave off market share growth from alternative capital.
“Overall demand increased for the industry, but growth has been isolated to few regions and lines of business,” explains Aon Benfield.
The reinsurance market remains favourable to buyers, and the continued expansion of both traditional and alternative reinsurance capital means there’s an abundance of capacity to meet expected reinsurance demand, says Aon Benfield.
Growth of 4.7% in the traditional sector was largely driven by solid reinsurer earnings and unrealized gains on bond portfolios, which occurred in response to further declines in interest rates, says Aon Benfield. In fact, the reinsurance brokerage reports that all but one major reinsurance company monitored in the Aon Benfield Aggregate peer study recorded growth in equity during the nine month period.
“Return on equity stood at 9.1 percent, down from 10.2 percent previously, despite material support from unrealized gains. This remained an attractive return relative to risk-free rates,” explained Aon Benfield.
Increased, new reinsurance capacity is also coming from the formation of new reinsurance entities in developing markets, which are partly in response to regulatory changes. Developments in India and China, for example, has seen a number of foreign reinsurers look to establish regional branches, and also the formation of new carriers, such as Qianhai Re and ITI Re, among others.
The Lloyd’s of London specialist insurance and reinsurance marketplace saw four new Syndicates launch for 2017, which helped to take Lloyd’s underwriting capacity to beyond £30 million (roughly $37 million) for the first time. Although, Aon Benfield does explain that the majority of the Lloyd’s capacity increase when compared with the previous year, reflects the impact of Sterling devaluation since the Brexit vote.
Aon Benfield explains that the reported capital positions of reinsurers have been inflated by unrealized gains on bonds, an impact of the ongoing ultra-low interest rate landscape, which has also seen insurance and reinsurance risk become more attractive as ordinary investment yields have declined.
Reinsurers are continuing to search for ways to navigate the softened marketplace, and insurers appear keen to take advantage of the efficient glut of traditional and alternative reinsurance capital under more favourable terms, a trend the reinsurance broker expects to persist into 2017.