A new report from insurance rating source A.M. Best finds that the global reinsurance market booked its second loss in 10 years in 2016; the other occurred in 2011.
The Best's Special Report, “Down But Not Out: Reinsurers Look to Reposition Amid Market Disruption,” finds that the current market “appears to be operating amid malaise” and ended 2016 with an accident combined ratio of 101.0.
While some may say this is a conservative loss, the reality is that since 2013, the sector's combined ratios have continued to weaken, leading A.M. Best to change its outlook for the insurance sector to negative as far back as the summer of 2014. The report describes the return on equity for the last three years as “anemic,” ending at 8% in 2016, or approximately five percentage points lower than 2013, with a dedicated reinsurance capacity at an estimated $420 billion.
The report also says that some of the loss was masked by interest in mortgage reinsurance as well as an increase in loss reserve development. However, the company finds that an above average catastrophe year, as seems to be the case with both Hurricane Harvey and Hurricane Irma, could be viewed as “exceedingly damaging” for reinsurers.
“If the reinsurance market is booking the accident year combined ratio at a loss in a relatively benign catastrophe year, and that in and of itself is not the impetus for change, the next logical question is: What will it take to turn the market?” asked Robert DeRose, A.M. Best senior director in a press release. “At this point, it does not appear that the lack of underwriting profit in the current book or continued erosion in return on equity will break the cycle.”
The report also identified the top 50 reinsurers as measured by the reinsurance gross premiums written (GPW). The top 10 reinsurers are:
Swiss Re Ltd.
Munich Reinsurance Company.
Hannover Ruck S.E.
Berkshire Hathaway Inc.
Reinsurance Group of America Inc.
China Reinsurance (Group) Corporation.
Great West Lifeco.
Korean Reinsurance Company.
Combined, Swiss Re and Munich Re represent more than 30% of the GPW and these 10 companies comprise $156 billion or a little under 70% of the total GPW, meaning much of risk is held by these firms.
The hurricane impact
A.M. Best assembled a panel of rating and insurance-linked securities (ILS) experts to evaluate the market.. One question addressed the impact of a major event on the market.
Aditya Dutt of RenaissanceRe shared that, “At a very simple level, you have an expected loss. Let's call it a very big one. Pick Florida because everyone thinks they know about Florida. A big loss occurs in Florida. It's a well-modeled region of the world. We think what prevails is the capital provider. The capital provider is comfortable putting in more capital.” Frank Majors of Nephila Capital believes that capital can flow into risk much more efficiently than it did 10 to 15 years ago. He says from an underwriting perspective, when investors have more time to ask questions and conduct research on a specific risk, the more willing they are to reinvest following a negative event.
Majors explained that for investors who have a 2% to 10% allocation to an asset class and suffer a loss, the impact overall on their fund would not be substantial. “It's not going to hurt them if they’ve got a 5% allocation and it's down 20%. That's down 1% on their fund. They can take a long view on that.”
Risk modeler AIR estimated insured losses from Hurricane Irma at $20 to $65 billion for the U.S. and Caribbean. Data analytics firm CoreLogic estimated that more than 3.4 million residential and commercial properties in Florida were at risk for hurricane-driven storm surge.