Q3 Global Reinsurance Trends
Reinsurance Capacity Overview
Total capacity is up modestly from an already strong position: Aon estimates that global reinsurer capital totaled USD660 billion as of June 30, 2021, an increase of USD10 billion relative to the end of 2020, driven by growth in both traditional and alternative capital. This calculation is a broad measure of the capital available for insurers to trade risk.
New capacity is expected to set a record: USD25.1 billion of new reinsurance and retro capacity was raised in 2020 / 2021 (both debt and equity), the majority of which has come from existing markets. The ILS market experienced near record issuance volume, with first half issuance of USD 8.5 billion, and conditions are favorable for record issuance volume for full year 2021, eclipsing the previous record set in 2020.
Strong earnings were reported despite ongoing challenges: Reinsurers reported strong earnings for the first half of 2021, despite challenges from increased volatility, particularly related to ongoing COVID-related litigation, property catastrophe frequency (e.g., Winter storms including Uri, European floods, Hurricane Ida, U.S. wildfire events, and other events which are still unfolding), and inflationary pressures.
Capital can now support new, nontraditional risk types: The record capital will support not only transfer of traditional risks but also nontraditional risks including U.S. Mortgage Risk transfer, Cyber, and Intellectual Property which continues to experience cautious growth. Opportunities for growth into new risks with sufficient data to measure frequency and severity trends will continue.
Rate and economic forces contributed to strong reinsurer performance: Aon estimates the sector non-life combined ratio at 93.9 percent, with the benefit of previous rate increases now visibly earning through, while the strong performance of stock markets and alternative assets continued to boost investment results. Overall, the annualized return on equity is estimated at 13.4 percent.
Reported capital positions were muted: The impact on reported capital positions was muted by the extent of the capital returned to investors in the form of dividends and share buybacks. Additional factors included unrealized losses on bonds taken directly to equity (relating to movements in interest rates) and appreciation of the US dollar. Consequently, Aon estimates that traditional capital rose by USD7 billion to USD563 billion as of June 30, 2021.
Areas of Insurer Focus Impacting Reinsurance
Insurer-Driven / Custom View of Risk: With continued loss experience from perils typically viewed as secondary or unmodeled, combined with the “model miss” often identified in post-event evaluation, as well as the evolution of data availability and methods to evaluate it, insurers are increasingly focusing on a custom View of Risk approach. This allows for better evaluation of catastrophe risk at the portfolio level as well as at individual risk levels. In addition, as many of these perils are often protected through aggregate reinsurance, a sophisticated understanding of portfolio exposure can be helpful in determining coverage and price.
Climate Change: In alignment with global scientific parameters, (re)insurers are increasingly looking for ways to quantify the future impact on portfolios from increased exposure. The heightened importance of climate change on underwriting is being considered by all parties. In addition, complying with regulatory disclosure requirements has put pressure on the industry to act.
Contract Language: As the claims impact of COVID-19 abates, increased scrutiny on contract language will continue for 2022 renewals. Exclusion language for communicable disease and cyber will have continued focus.
Rating Agency and Regulatory Actions: Early states of differentiation exist regarding View of Risk, ESG, and in particular, climate change, from rating agencies and regulators around the globe.
Global Reinsurer Capital
