“Probably impossible” for industry to achieve 10% ROE in 2016: Catlin

by Artemis on January 19, 2016

Ongoing pressure in the insurance and reinsurance sector suggests that achieving a 10% or greater return on equity across the industry is likely “impossible” as both underwriting and investment returns remain depressed, according to Stephen Catlin.

Property/casualty insurers and reinsurers have benefitted from the benign catastrophe environment in recent years, helping them to post more acceptable profitability. But the persistence of a host of market pressures as 2016 gets underway, suggests a difficult year ahead for the majority of industry participants.

Speaking with insurance and reinsurance ratings agency A.M. Best, Executive Deputy Chairman of XL Catlin, Stephen Catlin, predicted that a difficult 12 months are in line for the P&C industry as a whole, underlined by a “lucky” few years on cat losses, the inevitability that attritional loss ratios must rise, and a realisation that investment returns are to remain low.

As a result, “to achieve a 10% ROE for the industry as a whole for 2016, is probably now impossible,” said Catlin.

Towards the end of last year insurance and reinsurance market analysts and experts stressed that re/insurance entities were using reserve releases and the benign catastrophe loss environment to perhaps mask true profitability.

Warning that during 2016, with interest rates set to remain low, further rate declines across the majority of business lines expected, excess capacity and increased competition to persist and even intensify, that the challenges would begin to show in companies’ results.

“I do think we’ve been very lucky, really for the benign catastrophe experience that we’ve had, because if you look at the exposure it’s actually increased significantly,” said Tad Montross, Chairman and Chief Executive Officer (CEO), General Reinsurance Corporation (Gen Re), speaking to A.M. Best.

Montross highlights that in recent times the P&C industry has experienced an extremely positive prior year reserve run-off landscape, largely driven by the “very good accident years” between 2003 and 2007. However, “more recent accident years are not as well reserved, and in some classes of business we’re beginning to see a little bit of adverse development,” advised Montross.

The reality is that as true underwriting profits have become increasingly difficult to achieve, especially at a level that’s desirable to shareholders, insurers and reinsurers in the P&C sector have been able to bolster their balance sheets with prior year loss reserves.

But as highlighted by Montross, and also by Arch Capital Group Chairman, President, and CEO, Dinos Iordanou, as reserves begin to diminish owing to a possible over reliance in some quarters, and also the lack of cat events globally limiting firms’ abilities to top up reserves, the performance of some will likely begin to suffer.

Iordanou expanded on this point; “We are still dependant on reserve releases; we’re eating hay from the barn so to speak, that we have put away through the good years in the past decade. And as those reserves get exhausted I think the performance will suffer, and we’re starting to see some of those signs already in 2015 and I think that will continue in 2016.”

Montross added; “I don’t think we are going to see the level of positive prior year reserve run-off in the future, and I think we are going to see a normalisation on catastrophes. So, put all that together I think the industry’s got some real headwinds for 2016.”

The message from the executives is a clear and important one, then. Warning that as global catastrophe loss levels normalise somewhat, combined with the exhaustion of reserves, continued low interest rate environment and the challenges on the investment side of the business, 2016 is set to be another testing, and difficult year for the P&C industry as a whole.

This all points to lower underwriting profitability and the likelihood that RoE’s for individual firms, and the sector as a whole, will most likely come down further during 2016 as the ability to boost them through reserves diminishes, and the numerous other market challenges continue to drive insurance and reinsurance industry change.

Therefore a need to maintain discipline and patience, particularly on the underwriting side of the business will be paramount to achieving a successful 2016, or an ability to lower the cost of underwriting capital, in order to continue to operate profitably.

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