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Reinsurer reserve redundancies continue to deteriorate

19th May 2017 - Author: Luke Gallin

Reinsurance market conditions have remained challenging in 2017 as the soft pricing environment persists, and analysts at Fitch Ratings have noted further deterioration of overall reserve redundancies across the non-life space, suggesting companies are less able to utilise reserves to bolster weak underwriting returns.

Declining reinsurance profitsThe decline in reinsurance industry reserves has been discussed throughout the softening market cycle, as some reinsurers looked to aggressively release reserves to bulk up poor quarterly and annual underwriting returns, exacerbated by diminished investment returns in response to the low interest rate environment.

In a recent industry note, analysts at Fitch Ratings discussed the overall deterioration of reserves in the non-life space. According to Fitch, the results of the group of 25 non-life reinsurers that it tracks included 6.9 percentage points of favourable prior-accident-year reserve development, which is down from the 7.8 percentage points saw a year earlier.

“This decline reflects a steady deterioration in overall reserve redundancies as more recent accident years appear to be reserved less conservatively.

“Some reinsurers have reported reserve deficiencies in certain product lines, particularly longer-tail classes, such as casualty and specialty reinsurance,” said Fitch.

Despite overall, global catastrophe losses in 2016 reaching the highest level since 2012 and coming in just above the ten-year average, insured losses from natural catastrophe events have been relatively benign in recent times. This, combined with a need to bolster returns, and using reserves to do so, has seen varied reserving practices across the space, with some companies perhaps showing less discipline and releasing reserves in a more aggressive manner than is perhaps required.

As a result of higher catastrophe losses in 2016 and a reduction in favourable reserve development, the group of 25 reinsurers tracked by Fitch recorded a calendar-year reinsurance combined ratio of 91.1% in 2016, compared with 86.7% in 2015.

The group’s underlying accident-year reinsurance combined ratio weakened to 91.5% in 2016, compared with 91% in 2015, excluding reserve development and catastrophes, explained Fitch.

“This weaker performance reflects pressure on reinsurance margins with premium rate declines and a higher expense ratio from increased ceding commissions. The deterioration is also due to an increase in casualty reinsurance and quota-share business, which carries a higher, but less volatile, average loss ratio than excess-of-loss property catastrophe business,” said Fitch.

With soft market conditions expected to persist throughout 2017 absent a truly significant, market turning event, it’s likely that overall reinsurers’ reserve redundancies will continue to deteriorate. As a result, firms will be less able to utilise reserves to bolster returns, suggesting that combined ratios could creep ever closer to the 100% mark in the months ahead.

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