The new Best’s Market Segment Report, “Global Reinsurance: Fighting the Last War,” notes that the days of large catastrophic events triggering widespread market hardening are gone, replaced by pockets of microcycles, based on geography and loss experience. The 2017-2018 catastrophes showed how the overall reinsurance market failed to recognize and price for the fundamental changes that had occurred operationally and structurally in Florida’s property market. The 2018 California wildfires and Typhoon Jebi in Japan also caught many underwriters and capacity providers by surprise, due to a failure to manage appropriately and adequately price for the actual underlying risk. The failure of some reinsurers to adapt to changing market dynamics has resulted in the global reinsurance composite producing a five-year average combined ratio (2014-2018) of 97.6% and a return on equity of 6.0%.
According to the report, however, the evolution of the market can favor reinsurers if they embrace change and innovation in their business models. While technology can be a key driver of change, it is not the only one. Paramount to the continued evolution in the reinsurance sector has been the sourcing of new, cheaper sources of capital on one end, and more-inventive ways to source risk on the other.
Third-party capital continues to proliferate as investor interest has increased alongside more varied reinsurance structures, and has become more closely aligned with traditional reinsurance capital. Despite the capital markets’ increased influence, dedicated reinsurance capacity essentially remained flat in 2018, at $436 billion, with a single-digit percentage increase in convergence capital to $95 billion from $87 billion in 2017. AM Best expects this trend to continue in 2019, and observed as third-party capital providers and traditional reinsurers pushed through increased rates at the midyear renewal for U.S. and Japanese programs. However, AM Best is concerned that supply-demand considerations drove the underwriting discipline as much as the pricing models, and therefore fear that overcapacity could push pricing to irrational levels again.
With the costly disasters of 2017 and 2018, reinsurers have entered into a period of seismic change. AM Best believes no two market cycles are ever quite the same, and so reinsurers that reposition their portfolios tactically could be better prepared for whatever challenges lie on the horizon. “Like the proverbial ‘generals always fight the last war,’ many reinsurers that allow past performance to shape their expectations of future performance will be the ones more likely to be caught off-guard again,” said Scott Mangan, associate director.
AM Best’s market segment outlook on the global reinsurance sector remains stable, primarily reflecting a more-stabilized, non-life pricing environment, as well as a stable market environment in the global life reinsurance segment. Although the operating and competitive landscapes of these two major reinsurance business segments are distinct, the resulting diversification benefits the global reinsurance segment from an overall earnings perspective. Going forward, particularly for non-life reinsurers, the question is whether the lessons learned will result in any meaningful and sustainable change in the market.
Other highlights from this year’s report include:
• The most notable movement in AM Best’s highly regarded annual ranking of the Top 50 Global Reinsurance Groups was Swiss Re Ltd. moving back into the top spot as the world’s largest reinsurer, as measured by reinsurance gross premium written. Other than 2016, when Swiss Re was No. 1, Munich Reinsurance Company had held the top spot every year since 2010, and was No. 2 in this latest ranking. This report also breaks out two sub-rankings of top non-life and life global reinsurers.
• The 2017-2018 catastrophe events increased attention on the collateralized reinsurance market, as it absorbed a substantial amount of the related losses. However, it remains the fastest-growing segment of the insurance-linked securities market, with market capitalization of approximately $55 billion out of a roughly $98 billion ILS market.
• The global reinsurance report also provides in-depth looks at the Lloyd’s and life reinsurance markets, as well as geographic regions such as Latin America, MENA and Asia-Pacific.
To access a copy of this report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=289149 . A short video interview with AM Best Senior Director Robert DeRose and Associate Director Scott Mangan on the report is available as well.