The shift in reinsurance market dynamics following the catastrophe events of 2017 has resulted in a critical need for scale, according to Mike van Slooten, Head of Business Intelligence at global insurance and reinsurance broker, Aon.
Addressing an audience this morning at the Aon United ILS Event in London, UK, van Slooten discussed how the reinsurance industry has changed from prior to the 2017 catastrophe events to now.
The trio of devastating hurricanes in 2017 combined with other significant catastrophe events, resulted in one of the costliest years on record for global insurers and reinsurers.
The events came on the back of 12 years without a major catastrophe loss in the U.S., a decade of low interest rates, a substantial rise in the entry of alternative, or third-party reinsurance capital, and reduced demand for reinsurance protection in developed markets.
In light of these factors, explained van Slooten, prior to 2017 and 2018 events the return on equity (ROE) expectations of global reinsurers had declined as companies came to realise that intense competition and falling rates had resulted in a structural reduction in achievable returns, which ultimately led to the consolidation of smaller players as they struggled to meet their cost-of-capital requirements.
Combined, 2017 and 2018 catastrophe events resulted in industry losses of around $250 billion, which, eventually led to a slowdown in the entry of alternative capital (although it continued to outpace traditional market growth during this period) as markets adjusted to losses. At the same time, van Slooten explained that interest rates in the U.S. were raised, although with a recessionary threat looming pressure on investments remains.
Following these events, re/insurers were hopeful of significant rate increases which ultimately failed to materialise in 2018 after 2017 events, as competition from alternative capital persisted and also the fact rates had fallen so low during the softened market cycle.
However, a series of cat losses in 2018 again hit the traditional and alternative capital market, and while rate rises were muted at the January 1st, 2019 renewals, they have improved more meaningfully through the year, most notably for loss-affected accounts.
van Slooten noted that after the events of 2017 and 2018 capital has become more discerning and today, there is modest global growth in reinsurance demand, which he said is very exciting for the industry. Companies are increasingly leveraging reinsurance for post-loss management of earnings volatility, while infrastructure development and new risks, alongside a growing prevalence of risk-based capital regimes, is also spurring demand for protection, he explained.
A rise in demand at a time when rates are moving in a more positive direction sounds promising for the sector, and will be welcomed news after the prolonged soft market and muted demand for protection. However, the peak of the 2019 Atlantic hurricane season looms, and as market participants will be aware, it only takes one significant event to alter market dynamics.
