Aon Benfield sees reinsurance capacity building despite 2017 cat losses

The traditional reinsurance sector as a whole continued to make money in 2017, despite the huge catastrophe losses in 2017, according to Aon Benfield. Looking at the 2017 results of the 21 major reinsurers comprising the Aon Benfield Aggregate, net income across the group stood at $4.0bn, contributing toward a 2.5% increase in total equity to $204bn. The return on average equity stood at 2.0%. Aon Benfield said that property and casualty underwriting losses stood at $10.6bn on net premiums earned of $144bn, representing a combined ratio of 107.4%. Natural catastrophe losses of $23.6bn were partly offset by favourable prior-year reserve development of $5.9bn. Capital continues to build, said Aon Benfield, noting that the 1 April 2018 treaty reinsurance renewals, dominated by Japan, India and Korea, “saw traditional reinsurers continuing to show strong appetite for this business, and buyers in these markets found ample capacity to meet their risk transfer needs and to support geographic and product growth aspirations”. According to Aon Benfield, alternative capital showed significant growth during the course of 2017. While losses in the third quarter tested the market, institutional investors responded by showing renewed commitment to an asset class that has delivered relatively attractive, non-correlating returns over time, said Aon Benfield. “Catastrophe bond activity has been at record levels for a first quarter and we expect to see further growth in alternative capital during 2018,” it said. “Many investors previously enjoyed excellent returns and losses in 2017, which generally fell within published risk-tolerance ranges. In addition, the prospect of improved returns in the classes and territories most affected has attracted new participants. Continued growth in alternative capital is translating into a growing influence in the market, said the reinsurance broker. Aon Benfield said it estimates that global reinsurer capital stood at $605bn at 31 December 2017, an increase of 2% relative to the end of 2016. Traditional capital rose by $2bn to $516bn, while alternative capital rose by $8bn to $89bn. The increase in global reinsurer capital may seem counterintuitive, given the $136bn of global-insured natural catastrophe losses tracked by Impact Forecasting in 2017, said Aon Benfield. But it added there were a number of factors that explained this, including the fact that a portion of the losses from the major events in the US were retained by various government agencies (about $20bn). In addition, the reinsurance market picked up a relatively low proportion of the private sector losses, due to the generally high retentions carried by primary insurers (Aon Benfield estimates less than one third). Continued favourable prior-year reserve development and better-than-expected investment returns, together with capital markets investors continuing to show strong appetite for insurance risk, were also factors. Noting the M&A deals involving AIG with Validus, and AXA with XL Catlin, Aon Benfield said: “We believe there is scope for further consolidation in the sector, driven by the quest for growth, the need to optimise expense and capital efficiency, and the external pressure now being applied to certain franchises by investors and ratings agencies. Major losses have been below average so far in 2018 and capital market conditions have been relatively benign. We conclude that global reinsurer capital remains at peak levels ahead of the mid-year renewals in June and July, which will likely result in strong competition, even for loss-impacted business.”

Aon Benfield sees reinsurance capacity building despite 2017 cat losses

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