Reinsurers’ focus on protecting their balance sheets rather than absorbing earnings volatility has led to a trend of shifting unprofitable loss layers back to primary carriers, and executives expect this trend to continue throughout 2023 and likely into 2024, KBW noted.
This trend is driven by rising reinsurance rates and higher attachment point. The primary carriers, include smaller and/or regional carriers that may be undercapitalised for such risks, KBW stated.
In a recent investor meeting with rating agency executives, the focus was on Bermudian reinsurers, shedding light on key takeaways regarding the state of the global reinsurance industry.
The discussions revolved around industry capital, underwriting performance, and emerging risks that could impact reinsurers in the coming years.
According to the executives, the estimated total global reinsurance industry capital at the end of 2021 stood at approximately $500 billion.
Additionally, there was an estimated $90-95 billion of alternative capital available. It was suggested that around 80% of this capital was required to sustainably support global reinsurance premiums. However, due to cumulative underwriting losses and negative marks to market, the ratio decreased to around 90% by the end of 2022.
This indicates that the aggregated industry capital falls short by approximately $60 billion compared to the pre-2023 equilibrium. Furthermore, an additional $15-20 billion is needed to account for factors such as elevated financial, social, and medical inflation, climate-related risk trends, and anticipated increased demand in the 2024 January renewals.
The executives emphasised that traditional (re)insurers were adequately capitalised. However, they were cautious in deploying their capital. The rating agency’s approach was to mostly disregard negative marks, adding back all but 5% of post-mark surplus.
This approach was considered appropriate, as the possibility of an immediate “run” analogous to that experienced by banks due to a major catastrophe loss was deemed unlikely.
Examining recent reinsurer performance, the rating agency estimated the average return on equity (ROE) for global reinsurers between 2017 and 2021 at approximately 4.5%.
This figure fell short of their estimated cost of capital over the same period, with some of the underperformance attributed to primary insurance companies benefiting at the expense of reinsurers through static retention levels. However, performance improved somewhat in 2022 and has been more favourable in 2023 so far.
The executives expressed their belief that the estimated losses of $10-15 billion resulting from the Russia-Ukraine war were likely low.
However, due to considerable uncertainty, particularly regarding the timing of war-related cancellations for aircraft trapped in Russia, litigation over the next 2-3 years is anticipated.
The losses are expected to impact European (re)insurers and Lloyd’s, with potential direct or assumed exposure for Bermudian reinsurers.
The executives also highlighted Perfluoroalkyl and Polyfluoroalkyl Substances (PFAS) and cyber risks as emerging concerns that could lead to coverage litigation relating to pollution, contamination, bodily injury, environmental damage, and evolving cyber threats in the years to come.
