Majority of re/insurers feel industry is over-capitalised: Goldman Sachs

Global insurance and reinsurance firms feel the industry is adequately or over-capitalised, exacerbated by a continued lack of large catastrophe losses as well as competition from new entrants, according to Goldman Sachs Asset Management (GSAM).

GSAM recently issued a report detailing the responses from its fourth annual Insurance Asset Management Survey, titled “Too Much Capital, Too Little Return,” exploring the views and opinions of 267 international re/insurance Chief Investment (CIO) and Chief Financial Officers (CFO).

The survey reveals that roughly 50% of global reinsurers that took part in the study feel that the industry is over-capitalised, while 45% of property and casualty (P&C) insurers feel the same about their industry. 33% of health insurers, 20% of multi-line insurers and 22% of life insurers also expressed concerns that their industry was currently over-capitalised.

Also, the survey reveals that 66% of life insurers and 69% of multi-line insurers believe that their industry is adequately capitalised. 44% of reinsurers also felt this way, as did 49% of P&C firms and 67% of health insurers.

Interestingly, a small section of respondents noted an opposing view of the market to this, with 12% of life insurers claiming their industry was under-capitalised. This was also the case for 6% of P&C insurer responses, 11% of multi-line insurers and 6% of global reinsurer responses.

Of those that felt under-capitalisation was an issue in the sector, it’s worth noting that roughly one fifth (21%) of re/insurers in Europe, the Middle East and Africa (EMEA) contributed to this.

So it’s clear from the figures that the majority of international insurers and reinsurers, from varied business lines feel that their industry is currently adequately or over-capitalised, with few feeling the opposite.

“In addition to having well-capitalised balance sheets, the significant growth in alternative capital has impacted reinsurers, who are experiencing pricing pressure as a result of the influx of new capital,” explains the report.

It comes as no surprise that reinsurance and P&C participants expressed the most concern of an over-capitalised market. In recent months the influx of alternative, or third-party capital in the global reinsurance space has intensified, as has competition, ensuring persistent pricing pressures in the reinsurance sector and the broader, primary markets, most notably in P&C.

And analysts at Keefe, Bruyette & Woods (KBW), the Council of Insurance Agents and Brokers (CIAB) and MarketScout have warned that the current, negative trend isn’t likely to abate anytime soon, with further competition and capacity predicted in the coming months.

The related pressures to global re/insurance operations resulting from the influx of alternative reinsurance capital has been well documented in recent months, as companies continue to navigate through the current soft market cycle.

While it’s widely acknowledged that growth of third-party and traditional reinsurance capacity can have a detrimental effect on rates, less noise circulates around the opportunities it provides, to offer efficient, innovative risk transfer solutions to less-developed regions of the world.

As long as it’s sitting in the market the abundance of capital will continue to stress market conditions and hinder potential returns, all the while continuing to filter down into primary business lines.

Releasing some of the capacity through risk transfer solutions, including reinsurance, catastrophe bonds and insurance-linked securities (ILS) will alleviate some of the stress from the sector, and also help to narrow the annual economic and insured loss gap.

Also read:

– Pessimistic re/insurers struggle on low investment returns: Goldman Sachs.