Reinsurance capacity grows despite major cat losses

Capital dedicated to reinsurance continued to grow in 2017 despite catastrophe losses, according to Guy Carpenter research.

Due to ongoing excess supply and overall market resilience at January 1, rate firming was generally moderate and pricing shifts focused on client-specific justification.

Dedicated reinsurance capital is estimated approximately $427 billion, up 2 percent from year-end 2016, according to calculations made in conjunction with AM Best.

While traditional capital is flat, convergence capital grew 9 percent to $82 billion including replacement of lost or trapped capital.

Last fall’s concentrated period of events, including four landfalling hurricanes of which three were Category 4 or greater, helped make 2017 the third year on record with insured catastrophe losses over $100 billion.

Guy Carpenter’s current estimate of $113.5 billion in insured loss excludes the US National Flood Insurance Program (NFIP), which does not significantly impact industry capital or profitability. The estimate also accounts for recent decreases in some estimated losses.

“Despite substantial catastrophe losses in 2017, the market demonstrated significant resilience with no notable capital withdrawal and moderate price increases,” said David Priebe, vice chairman, Guy Carpenter. “Evolving market dynamics and innovative reinsurance solutions serve to mitigate significant loss events and protect industry capital and profitability,” Priebe explained.

“The reinsurance and capital markets responded favourably to those companies who were able to present quality data and well developed and executed loss mitigation strategies. These measures support companies’ ability to attain customized risk transfer solutions and maximum protection for their risk profiles,” Priebe added.

In most lines, loss-impacted policies or those with thin margins were most likely to see price increases. The Guy Carpenter Global Rate on Line Index, measuring the change in catastrophe premiums year over year, increased 6.1 percent. This was driven by the impact of large loss activity and exposure growth, as reinsurers’ focus on flat risk adjusted pricing led to higher premiums for increased exposure. Unlike past firming events where supply and demand imbalances and shifting views of risk drove rates higher, the 2017 events were largely within model parameters, and overall industry capital did not decline.

With regards to profitability, Guy Carpenter noted that reinsurers have leveraged retrocession coverage more aggressively in recent years, supported by the use of convergence capital. This helped avoid a negative return on average equity (ROAE) for the Guy Carpenter Global Reinsurance Composite, a representative sampling of carriers in the sector, as of the third quarter. Despite the erosion of profits from the first half of the year by third quarter losses, the 10-year weighted average ROAE is 8.1 percent – a figure including two of the three costliest catastrophe years on record. While reinsurers exercised greater caution in deploying capital at January 1, there was no indication markets’ support of the sector was diminished.

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