Global reinsurance capital grew 15% but underlying returns decline: Willis Re

Strong investment market performance drove the total capital dedicated to the global reinsurance industry to $605 billion in 2019, reflecting robust 15 percent year-on-year growth.

According to a new report by Willis Re, the growth was achieved despite a 3 percent contraction in alternative capital.

As per the analysis conducted on 18 reinsurers, return on equity (RoE) for the subset increased significantly, from 4.2 percent in 2018 to 9.7 percent in 2019, driven by investment gains.

However, the underlying RoE, which excludes the impact of investment gains, abnormal catastrophe losses and prior-year reserve development, fell from an already low 4.3 percent in 2018 to 3.2 percent. The analysis showed that the reinsurance sector’s underlying RoE remains in gentle decline and is well below the industry’s cost of capital.

Willis Re said that a principal driver of the lower underlying RoE was the subset’s combined ratio. The reported combined ratio increased from 99.2 percent to 100.6 percent. On an underlying basis, ie, normalising catastrophe losses and excluding prior year reserve development, it rose from 102.3 percent in 2018 to 103.1 percent. This metric has also been increasing every year going back to 2013, it added.

James Kent, global CEO of Willis Re, said: “This analysis demonstrates how sensitive the global reinsurance capital base is to investment markets. Thankfully strong capital growth in 2019 allied to judicious investment strategies by many companies has put the industry in a good position to weather the current volatile environment. At the same time, the analysis demonstrates that underlying profitability remains a core focus for reinsurers resulting in rate increases across many lines of business, to support the pricing momentum on loss impacted lines that started in some cases in mid-2018.”