Total capital dedicated to the global reinsurance industry measured US$605 billion at year-end 2019, reflecting robust 15% year-on-year growth. This was primarily driven by 2019’s strong investment market performance and was achieved despite a 3% contraction in alternative capital, according to the latest Reinsurance Market Report from Willis Re, the reinsurance business of leading global advisory, broking and solutions company Willis Towers Watson (NASDAQ: WLTW).
Year-to-date 2020, much of this expansion will have unwound, due to the steep sell-off in equity and corporate bond markets. The significant swings in investment markets in March and April 2020 have resulted in year-to-date impacts to the global reinsurance capital base ranging from –5% to as much as –20%.
Willis Re conducts a more in-depth analysis on a subset of 18 reinsurers. The reported return on equity (RoE) for the subset increased significantly, from 4.2% in 2018 to 9.7% in 2019, driven by investment gains. However, the underlying RoE, which excludes the impact of investment gains, abnormal catastrophe losses and prior-year reserve development, fell from an already low 4.3% in 2018 to 3.2%. The analysis shows that the reinsurance sector’s underlying RoE remains in gentle decline and is well below the industry’s cost of capital.
A principal driver of the lower underlying RoE was the subset’s combined ratio. The reported combined ratio increased from 99.2% to 100.6%. On an underlying basis, ie, normalising catastrophe losses and excluding prior year reserve development, it rose from 102.3% in 2018 to 103.1%. This metric has also been increasing every year going back to 2013.
James Kent, global CEO, Willis Re, said: “This analysis demonstrates how sensitive the global reinsurance capital base is to investment markets. Thankfully strong capital growth in 2019 allied to judicious investment strategies by many companies has put the industry in a good position to weather the current volatile environment. At the same time, the analysis demonstrates that underlying profitability remains a core focus for reinsurers resulting in rate increases across many lines of business, to support the pricing momentum on loss impacted lines that started in some cases in mid-2018.”
Download the full report: The Willis Re Reinsurance Market Report is a biannual publication providing in-depth analysis of the size and performance of the reinsurance market. Analysis is based on the Willis Reinsurance Index group of companies. In 2019 the index included 39 companies from across the globe.