9 January 2018Insurance

Hard market could be short-lived as new capacity enters market

While reinsurance rates have hardened in many lines of business, this could be short-lived – something that may have long-term consequences for the structure of the reinsurance market, according to  Aon Benfield’s latest  Reinsurance Market Outlook report, which analyses the trends observed at the January 1, 2018, reinsurance renewals.

The report notes that while losses were heavy in 2017, large amounts of new capital have entered the market, which could dampen pricing in the medium to long term. But the report also highlighted the size of the protection gap, which does represent an opportunity for the industry.

Based on current Impact Forecasting estimates, natural catastrophe events caused economic losses of around $320 billion globally in 2017. Insured losses, covered in both the private market and by government-sponsored programmes, are estimated at $128 billion, making it the third most costly year behind 2011 and 2005.

The insurance recovery ratio of 40 percent once again highlights the protection gap evident in even the most developed markets, the report noted. As in 2005, the main driver of losses in 2017 was three Atlantic hurricanes in the third quarter – Harvey, Irma and Maria – which are estimated to have caused economic losses of $200 billion and insured losses of $80 billion.

Record-breaking wildfires in California rounded-out the year. The ultimate size and distribution of claims from these recent events remains uncertain, but it is already apparent that they are manageable and well-spread. The continuity and responsiveness demonstrated by the industry has clearly benefitted policyholders, the report notes.

“The scale of the reinsured portion of these losses is difficult to determine, partly because most providers of reinsurance capacity also write insurance business. However, it is clear that traditional reinsurers were well-capitalized going into these events and that, relative to 2005, more risk was being retained by primary insurers and more catastrophe exposure had been laid-off into the capital markets,” the report notes.

As a result, the losses in 2017 have been absorbed without compromising the availability of reinsurance capacity. The report stresses that recent events provide the first real test of an alternative capital sector that supplied almost $90 billion of capacity in 2017, up from only $10 billion in 2005. Significant funds backing fully collateralized reinsurance and retrocession contracts have been lost or trapped, but investors have responded by showing strong appetite for an asset class that is now viewed as being relatively more attractive.

“The sector has therefore proved its worth and come of age as a committed source of reinsurance capacity,” Aon Benfield said. “Against this backdrop, the January renewals were late, but orderly, with strong competition evident in many sectors. Reinsurance pricing has moved up in lines and territories most affected by recent losses, but we expect this trend to be relatively short-lived, given the amount of new capital entering the sector. This may have long-term consequences for the structure of the reinsurance market.”

Join us at Intelligent Automation in Insurance - London 2018.  Book by Jan 31st and you could save £400.

More of today's news

Liberty names new head of European claims

US tax changes prompts Assurant to tweak Warranty Group deal

Aon appoints head of legal and technical in London

Don't miss our insurtech email newsletter - sign up today

Already registered?

Login to your account

To request a FREE 2-week trial subscription, please signup.
NOTE - this can take up to 48hrs to be approved.

Two Weeks Free Trial

For multi-user price options, or to check if your company has an existing subscription that we can add you to for FREE, please email Elliot Field at efield@newtonmedia.co.uk or Adrian Tapping at atapping@newtonmedia.co.uk


More on this story

Insurance
12 January 2018   The extraordinary mudslides that hit California after torrential rains could result in an economic loss of more than $100 million and insured losses of tens of millions of dollars, according to Impact Forecasting, part of Aon Benfield.
Insurance
18 January 2018   Capital dedicated to reinsurance continued to grow in 2017 despite catastrophe losses, according to Guy Carpenter research.
Alternative Risk Transfer
5 February 2018   The amount of capital dedicated to writing reinsurance will increase to an estimated $427 billion in 2017, compared with $420 billion in 2016, according to AM Best.