Normalised cat loss loads to threaten non-life reinsurers: Swiss Re

Despite an expected overall RoE of roughly 13% for non-life reinsurers at year’s end 2015, a challenging investment landscape, any return to normalised catastrophe losses and declining reserve releases signal further challenges for the sector, according to reinsurance giant Swiss Re.

“The non-life reinsurance industry is caught between a fair present and cloudy future,” says Swiss Re.

Underwriting profitability for global non-life reinsurance entities have been solid so far in 2015, aided by the continued benign catastrophe loss environment and positive prior year reserve releases, leading Swiss Re to expect a reinsurance industry combined ratio of around 90%, or lower, for full-year 2015.

However, as underlined by Swiss Re and something we’ve discussed here on Artemis before, the underlying underwriting profitability of the reinsurance sector is masked by low-losses, excess capacity, and reserve releases.

In fact, according to Swiss Re’s recently published Sigma report, ‘Global insurance review 2015 and outlook 2016/17,’ excluding the positive impacts of reserve releases and benign cat losses, the overall reinsurance industry combined ratio for 2015 would be somewhere around the 100% mark.

Furthermore, Swiss Re explains that while the investment environment for reinsurers remains challenging and difficult to navigate, the masked, yet solid underwriting results throughout the first-three quarters of the year suggest an overall RoE of roughly 13% for the non-life reinsurance sector.

However, as with the overall combined ratio, once “adjusted for the special factors that boost the underwriting result, the average RoE would be lower around 6-7%,” says Swiss Re.

A continued lack of catastrophe loss events and the influx of alternative reinsurance capital have resulted in a supply/demand imbalance in the reinsurance industry. And, as expenses remain at historically high levels with firms fighting for business, combined with the other determining factors, RoE’s could begin to fall further, and faster.

And with true underwriting profit increasingly difficult to achieve and investment returns declining, at just 3.4% for the first-half of 2015 according to Swiss Re, firms have been utilising prior years reserve releases to boost their underwriting results.

But this approach will only work for so long, explains Swiss Re; “Reserve releases will eventually shift to a need to strengthen reserves, but it is difficult to forecast the timing.”

As a result of the underlying factors influencing the underwriting profitability and overall RoE for the global non-life reinsurance space, Swiss Re predicts premium growth in the sector to “weaken” in 2016 and 2017.

“Assuming average catastrophe losses, moderating rates, a less-benign claims environment than in the last three years and declining reserve releases, the combined ratio in non-life reinsurance is forecast to be at around 100% in 2016, the same as this year after adjustments,” says Swiss Re.

Adding further pressure to the non-life reinsurers, is the fact that the lower underlying RoE predicted by Swiss Re is similar to the average investor return from a lower risk insurance-linked securities (ILS) strategy.

Meaning that potentially, as cat losses return to a more historically average figure, reserve releases dwindle and should expenses get out of hand, the efficiency of an ILS model or structure, could become far more appealing, sustainable, and profitable to investors.