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Reinsurance capitalization rebounds in 2016

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Reinsurance capital stood at a peak level of $595 billion on Dec. 31, 2016, up 5% from the previous year, reinsurance intermediary Aon Benfield said Thursday.

The April 2017 edition of Aon Benfield’s Reinsurance Market Outlook said traditional reinsurance capital rose by 4% to $514 billion over the year to Dec. 31, 2016, driven by solid earnings.

Alternative capital, meanwhile, rose by 13% to $81 billion over the year to Dec. 31, 2016, principally reflecting additional deployment into collateralized reinsurance structures.

While expected returns have declined, the report said, insurance risk remains attractive to capital markets investors relative to other available opportunities, and low correlation with other asset classes remains a key consideration.

“Demand for reinsurance remains on a modest upward trend,” the report said, “as buyers increasingly recognize the value of the product in a world of proliferating risk-based capital regimes.”

Insured catastrophe losses totaled roughly $7.6 billion for the first quarter of 2017, which the report said indicated an active but below 10-year average level of payouts. This is 48% below the recent 10-year average of $14.8 billion. 

“The first quarter of 2017 has been dominated by economic, political and regulatory events that have combined to heighten the general sense of uncertainty,” the report said. “A second rise in U.S. interest rates is positive, in that it may herald an eventual return to a more ‘normal’ investment environment, albeit with the accompanying risks of higher inflation.”

However, the report said that major tax reforms under consideration in the U.S. could potentially disrupt the way the reinsurance market is structured, adding additional cost to the industry. This could also be true of the United Kingdom’s Brexit, which has now been formally triggered, the report said, while forthcoming elections in France and Germany will test the foundations of the European Union.

The report also said that “reinsurers are currently strongly capitalized and therefore well-positioned to cope with uncertainty.”

“Consequently,” the report said, “our outlook for the June and July 2017 renewals period remains positive, with ceding companies likely to achieve improvements in pricing, terms and conditions.”

Looking further forward into 2017, Aon Benfield said, El Niño is expected to officially return during the second half of the calendar year.

Willis Re weighs in on April 1 renewals

In addition, Willis Re Inc.’s “1st View” report, which was released April 1, said risk-adjusted rate reductions on short-tail classes continued to moderate.

“While international buyers achieved slightly larger reductions as compared to U.S. and Lloyd’s buyers,” the report said, “the extent of the reductions range from flat to mid-single digit reductions and not the low double-digit range which were seen 12 months ago. Gratifyingly for reinsurers, overall limits purchased have not reduced, and some have increased, as more buyers seek additional protection. Retentions have remained largely stable.”

The Willis Re report said that catastrophe bond spreads have continued to decline as many investors have become interested in increased liquidity.

The pipeline and range of private insurance-linked securities transactions continues to grow, the report said, adding speed and flexible options for those companies unable to access capacity in more liquid forms.

“As reinsurers look to the rest of this year,” the Willis Re report said, “they can draw comfort that in many cases reductions are slowing and unbridled competition is abating as managers face the buffers of tighter regulation, better pricing analytics and transparent shareholder expectations.”