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Reinsurance market demonstrates its resilience at 1/1: Guy Carpenter

18th January 2018 - Author: Steve Evans

Commenting on the state of the global reinsurance market after the key January reinsurance renewals, broker Guy Carpenter notes how resilience the market has been and that little in the way of capital has evaporated despite the major losses of last year.

Guy Carpenter logoIn fact, Guy Carpenter’s analysis shows that reinsurance capital continued to expand throughout 2017 and into the renewals, noting that both traditional and alternative capital providers replenished lost capacity in time for January 1st.

“Despite substantial catastrophe losses in 2017, the market demonstrated significant resilience with no notable capital withdrawal and moderate price increases. Evolving market dynamics and innovative reinsurance solutions serve to mitigate significant loss events and protect industry capital and profitability,” explained David Priebe, Vice Chairman, Guy Carpenter.

Guy Carpenter’s measure of global reinsurance capital, which it estimates with the help of A.M. Best, rose 2% in 2017 to close out the year at $427 billion.

Alternative reinsurance capital, meanwhile, rose 9% to reach $82 billion including the replacement of lost and trapped capital, the broker says, but traditional reinsurance capital was flat for the year.

Guy Carpenter estimates that the major losses of 2017 cost the insurance and reinsurance industry $113.5 billion, excluding NFIP losses, having accounted for some recent decreases in estimates.

The Guy Carpenter Global Rate on Line Index, which tracks the change in catastrophe premiums year over year, increased 6.1% at the renewals, as loss-affected policies with thin margins in most lines of business saw increases.

However, this is a much smaller increase than seen after other comparable industry loss years, to which the broker explains, “Unlike past firming events where supply and demand imbalances and shifting views of risk drove rates higher, the 2017 events were largely within model parameters, and overall industry capital did not decline. Assessment of the market response will continue through the spring, when many of the most heavily loss-impacted programs renew.”

But the main story at the renewal is one of reinsurers and alternative capital providers continuing to support their ceding clients, with well-prices coverage despite the losses they have faced. This level of resilience has been assisted by the availability of alternative capital, which has helped to dampen rate rises and maintain a flatter pricing cycle across reinsurance.

“The reinsurance and capital markets responded favorability to those companies who were able to present quality data and well developed and executed loss mitigation strategies. These measures support companies’ ability to attain customized risk transfer solutions and maximum protection for their risk profiles,” Priebe continued.

The use of retrocession also helped to protect reinsurers and maintain market stability, another factor for which the convergence and alternative capital market is providing help to make reinsurers more resilient to major losses.

Guy Carpenter explained that the 10-year weighted return on average equity (ROAE) for the Guy Carpenter Global Reinsurance Composite is 8.1%, despite the impact of the third quarter losses, showing reinsurers remain profitable, although perhaps at levels below where they would have liked to see their returns a decade or more ago.

“While reinsurers exercised greater caution in deploying capital at January 1, there was no indication markets’ support of the sector was diminished,” the broker explained.

Investors continue to support reinsurance, but the reinsurers are going to have to come to terms with a lower return environment, making their efficiency and ability to be resilient in the face of losses increasingly important.

2017 has demonstrated this resilience is there. But can reinsurers maintain levels of profit that are acceptable for their business models and shareholders over the longer-term, at a time of a much flatter market cycle?

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