Despite a sub-par operating climate, global reinsurers have managed to squeeze out relatively reasonable returns on capital and compensate investors while sustaining organic growth in capacity, according to a newly-issued report by A.M. Best Co. Quite an accomplishment, especially considering all the various obstacles they have and continue to navigate.
Over the past two-and-a-half years, catastrophes worldwide have inflicted approximately $190bn in insured losses. For global reinsurers, these events were primarily a drag on earnings, as balance sheets remained robust. The challenge of managing loss accumulation from global catastrophes was evident in 2011, and since 2008 reinsurers have faced numerous hurdles due to a weakened global economy: deteriorating investment returns; more volatile investments; suppressed growth opportunities; increased client retentions and competitive pricing.
Now another hurdle has materialized on the horizon in the form of third-party capital. With excess capacity prevalent among the traditional reinsurers, pricing in the market is already very competitive. This is most evident in longer tail casualty classes, leaving only shorter tail specialty and property classes up for the chase. While the capital markets historically have provided capacity out on the tail for property/catastrophe risk, generally in the form of catastrophe bonds, industry loss warranties and other collateralized structures, it now appears investors, asset managers and bankers are showing more interest in the lower layers of catastrophe programmes, as well as in other specialty and casualty classes.
Various reinsurance brokers have reported that as much as $45bn of additional capacity has entered the reinsurance market in recent years, representing 14% of the current global property limit. Hedge funds, pension funds, endowments and trusts looking for a bigger slice of the pie are lured by the relatively favourable returns, float and uncorrelated risk that the reinsurance business offers. However, industry headlines may be aggrandizing the true reinsurance appetite of this third-party capital. Front-line sources indicate that capital is entering methodically and precisely, not just rushing in blindly.
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