$135bn reinsurance overcapacity a significant driver of softening: RBC

by Artemis on June 10, 2015

The level of overcapacity in the global reinsurance sector is a significant driver of the softening market, and RBC Capital Markets estimates that by the end of 2014 reinsurance was home to roughly $135 billion of surplus capacity.

In a recent report analysts from RBC Capital Markets examine the European reinsurance industry, noting continued market pressures and what they believe to be a serious over-supply issue.

“Based on our analysis, we believe that there is a significant imbalance between the demand for reinsurance and the supply side. As a result, we expect that prices will continue to come under pressure,” said RBC.

Following the trend of most reinsurance industry analysts and experts, RBC predicts the volume of alternative, or third-party reinsurance capital in the sector to persist and expand its market share, a phenomenon that coupled with intense competition from a wave of new market entrants contributes to a growing surplus of capacity, according to RBC.

“Capacity continues to be abundant with the reinsurance market not able to deploy capital into new areas of business faster than it can be generated with management teams reluctant to give back more than 100% of earnings,” advised RBC.

The report claims that the $135 billion surplus capacity figure greatly surpasses the potential insured industry loss total from any disaster event that has taken place in the last 100 years, highlighting just how significant and potentially damaging RBC feels the problem is.

The maths used to reach the $135 billion total is explained in more detail in the report, which can be read in full here, but simplified, RBC explains that roughly $211 billion is required to write total non-life reinsurance premiums, compared to a current reinsurance market worth of $346 billion. This, claims RBC, and using its calculation method, implies a capital surplus of roughly $135 billion.

The study continues to note that despite falling reinsurance prices, exacerbated by overcapacity and a supply-demand imbalance, new players continue to enter the international reinsurance sector, seeking to add desired diversification to their portfolios and access to returns uncorrelated with the wider financial markets.

“New entrants backed by long term capital providers continue to enter the industry, and we expect alternative capital to continue to increase in size and market share,” said RBC.

With the wave of new entrants predicted to continue and even accelerate in some forecasts, it brings to light the potential for new, innovative products aimed at protecting vulnerable regions of the globe where insurance penetration levels are dangerously low.

These solutions  and new initiatives could put to work some of the surplus capital highlighted in RBC’s report, and are perhaps the insurance and reinsurance industry’s best hope for draining away some of that excess capacity.

Artemis recently covered a report by reinsurance giant Swiss Re that raised the continued negative impact of highly populated, vulnerable regions of the world that are practically, entirely uninsured.

An issue that contributes to the expanding gap between annual economic and insured loss totals, something the insurance, reinsurance and capital markets all have the capability and expertise to narrow.

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