Reinsurers continue to offer coverage and terms to insurers that show that reinsurance capital is weathering the storm of the prior few years' catastrophe events, despite a reduction of 3% in total global reinsurance capital to $585bn at 31 December 2018, compared to 12 months previously, says Aon's Reinsurance Solutions.
Aon's April 2019 Reinsurance Market Outlook report, Supply Weathering the Storm, says traditional equity capital fell by $28bn, or 5% to $488bn over the course of the year, driven mainly by macroeconomic factors. These included:
- Higher US interest rates, resulting in unrealised losses on bond portfolios;
- Strengthening of the US dollar (the conversion currency for international capital positions); and
- A stock market correction in the final quarter of 2018, with a recent accounting change introducing significant additional volatility to reported results.
Assets under management in the alternative capital sector rose by $8bn to $97bn (+9%) over the year to 31 December 2018. The total is shown gross of collateral trapped on contracts impacted by the major natural catastrophe losses in 2017 and 2018.
Global reinsurer capital remains resilient in the face of insured natural catastrophe losses aggregating to over $240bn over the last two years. Excess reinsurance capacity continues to exist, despite an increase in demand for reinsurance solutions on a global basis.
The proportion of the losses accruing to reinsurers has been relatively low, given the profile of the underlying events and the high retentions carried by large primary insurers. Furthermore, the reinsured portion has been spread around a much broader pool of investors than has historically been the case.
Traditional reinsurers continue to display strong risk-adjusted capitalisation, as confirmed by rating agency and regulatory capital models. They utilise the capital markets to manage their gross exposures, carry significant budgets for net natural catastrophe losses and rely on investment returns to underpin their earnings. As a result, they have generally been able to trade through recent events without capital impairment.
The impact has been more significant in the alternative capital sector. Many investors have experienced some combination of lower than expected pricing, ‘creep’ on 2017 events and further losses in 2018 and the ongoing commitment of newer participants is being tested. This is affecting areas most dependent on this form of capacity, notably the retrocession market.
After a surge in late 2017 and early 2018, headline growth in alternative capital has slowed, as the continuing entry of new funds has been partly offset by losses from catastrophe events and redemption requests from investors. The total of $97bn at 31 December 2018 is shown gross of collateral trapped on contracts impacted by the major natural catastrophe losses in 2017 and 2018.
Aon expects growth to continue once this area of the market has fully digested the losses incurred over the last two years. Many long-term investors have made good returns over time and the strategy of investing in insurance risk for diversification purposes in a low interest rate environment remains valid.
Preliminary data for the first quarter of 2019 indicates that the global insurance industry endured an active, yet manageable few months of natural catastrophe-related payouts. Through the first three months, the industry has tentatively sustained losses of $7.1bn. This estimate will increase as event losses are further realized, but is currently 47% below the recent 15-year average (2004- 2018) of $13.5bn. When analysing the losses on a median basis ($9.6bn), the 2019 losses were 26% lower.
Looking forward to June and July renewals with heavy concentration in Florida and Australia, Aon's expectation is that the industry will continue to find adequate supply in the aggregate with individual companies seeing renewals directly in response to exposure change, general loss experience, and a continued focus on loss estimation and creep from the 2017 and 2018 events.