Re/insurance industry faces bright 2018 in P&C: Swiss Re

After a tough 2017 marked by low rates and large nat cat losses, the non-life re/insurance environment is expected to turn out much more benign in 2018 with premium growth driven by a global economic recovery and rate improvements, according to Swiss Re.

In a market where rates were often perceived as not reflecting the risk, hurricanes Irma, Harvey and Maria hit North America in the third quarter of 2017 together with two earthquakes in Mexico. In total, the events could result in insured losses of around $100 billion, according to estimates.

The US primary non-life insurance combined ratio for the full year 2017 is expected at around 109 percent due to the hurricane losses, according to Swiss Re.

2017 was “a little painful profitability wise on the underwriting side,” said Swiss Re chief economist Kurt Karl during a media briefing in London.

Reinsurance profitability in non-life has been declining since 2013 due to the soft underwriting conditions. Based on current claims estimates, the combined ratio for 2017 is expected to land at around 115 percent. The full year ROE is set to be at around negative 4 percent, according to Swiss Re.

This comes after the industry had already seen pressure from low interest rates and prices reducing profitability for a while. The primary non-life industry return on equity (ROE) for example declined to 3 percent in 2016 from 6 percent a year earlier.

But growth prospects are improving in the primary non-life insurance market. Global non-life premiums are forecast to increase by around 3 percent in real terms in 2018 and 2019. Stronger economic activity worldwide, particularly in emerging markets, will boost re/insurance growth. A growing middle class, particularly in Asia on the back of strong economic growth will lead to investments and asset growth which will in turn drive demand for insurance.

The consequences from higher economic activity for the re/insurance sector will be supported by some positive price movements, particularly in reinsurance lines, following the nat cat losses in the third quarter, Karl said. Swiss Re describes the third quarter natural catastrophes as a capital event and not only as an earnings event.

The positive rate dynamics are likely to add to primary insurance premium growth in the following years, Karl said.

While commercial lines may still experience some rate decreases, in personal lines and commercial auto rates are expected to move upwards, according to Swiss Re.

In the longer term, growth will likely be further supported by demand for cover for new and evolving risk exposures.

“Global growth will be pushing up and some price movements will be pushing up cession rates and reinsurance premiums globally,” Karl said.

While some reinsurers were hard hit by the third quarter nat cat events, Karl is not convinced that this will lead to more M&A activity.

Regulatory changes, low interest rate and now catastrophe losses have left some players in a significantly weaker position, he said. It is possible that we are going to see an uptick in M&A as a result, Karl said.

However, he noted that a couple of years ago Swiss Re research concluded that M&A activity was beginning to take off and it didn’t. “We haven’t had a huge swell of M&A activity so I am a bit hesitant to say it is likely after this,” Karl said.

“There is alternative capital available to retrocession through collateralised reinsurance for example or other ways to protect the balance sheet for the weaker players,” Karl explained.

Don't miss the latest industry news -  Sign up to our free email newsletters

Other news from this morning's newsletter

Commercial insurance rates decline for 18th consecutive quarter

Ironshore names new leader of global environmental unit

Climate risk protection gap of $1.7tr creates growth opportunities

Don't miss our insurtech email newsletter - sign up today