Despite 2017 being a terrible year for the reinsurance industry in terms of catastrophe losses, the industry’s capacity remains stable, according to the Reinsurance Market Report by Willis Re.
Shareholders’ equity in 34 reinsurers tracked by the Willis Reinsurance Index grew by 7.8% to US$371 billion at year-end 2017, the report said. The growth occurred despite catastrophe losses contributing to a combined ratio of 104.8% for the reinsurers, up 10.4 percentage points from 2016.
Furthermore, alternative capital increased to US$88 billion, up from US$75 billion by the end of 2016, despite the draw-down of some catastrophe bonds and collateralised reinsurance and retrocession layers in the aftermath of the 2017 Atlantic hurricane season.
The increase in equity was mostly due to unrealised investment gains of US$34.7 billion. However, when National Indemnity is excluded from the group, the total shareholders’ equity remained more-or-less stable, at US$343.7 billion.
According to the index, return on equity was at 3.4%, down from 8.0% in 2016, with aggregate net income falling to US$12 billion from US$26.6 billion. Profitability increased due to significant realised investment gains of US$9.7 billion, up 38.6%. This was attributed to a US$2.7 billion investment gain by Fairfax after it sold off two subsidiaries.
Underwriting losses were once more partially offset by high prior-year reserve releases. Reinsurers have returned capital worth US$15.6 billion through dividends (US$11.2 billion) and share buybacks (US$4.4 billion), surpassing the aggregate net income of US$12.0 billion.
Willis Re also compared 2017 with other catastrophe-full years 2005 and 2011. The sample of insurers had a combined ratio for 2017 of 107.4%, compared to 108.2% in 2011 and 112.8% in 2005. The impact of natural catastrophe losses in 2017 was 18.1% lower than 2011 (24.8%) and 2005 (25.8%), the report revealed.
“2017 was one of the worst years on record for insured natural catastrophe losses,” said James Kent, global CEO of Willis Re. “However, today the global reinsurance market is able to deploy more capital than at the same time last year. When a few exceptional transactions are considered, total reinsurance capacity is roughly stable, despite the hurricanes, earthquakes, wildfires, and other events which brought misery to millions of people in 2017. That’s a significant achievement for the reinsurance market, and a testament to its strength.”
Kent added: “The pressure on traditional reinsurers from alternative capital suppliers is stronger than ever, as many participants in this market cleared their first true major test. This increase in alternative capital, as well as the global reinsurance market having more capital to deploy, is continuing to dampen price increases in the mid-year renewals.”