expense ratios

Insurance and reinsurance companies face a conundrum. Driven by their need to modernise, innovate, digitalise and generally shift towards technology driven risk transfer business models, re/insurers are spending increasing amounts of money, causing their expenses and costs to rise as a result.

The results of many of the insurance and reinsurance industries leading players, over the first-half of 2016, show that one response to a challenging, competitive and softening market, is to try to spend your way out of it.

Analysts at Morgan Stanley predict that reserve releases will progressively decline in the coming months and years, contributing to as much as a 6% decline in P&C insurance and reinsurance earnings.

The underwriting performance of global Aon Benfield Aggregate (ABA) listed reinsurance companies in 2015 deteriorated by almost half a percent, to 90.2%. Driven by an increased expense ratio that was partly offset by a continued lack of major losses and favourable prior year reserves, potentially masking true profitability.

Reserve releases for property & casualty insurance and reinsurance companies are expected to shrink over the next few years, with what was 15% of operating income on average falling to 11%, presenting a real risk to P&C re/insurer earnings, according to Morgan Stanley analysts.

In the current soft reinsurance market environment, some reinsurers have been relying on prudent reserving and timely releases of capital to protect or enhance their profits. But with major losses remaining absent from the market, dwindling reserves could come back to bite.

Insurance and reinsurance firms are becoming even more pessimistic about their ability to maintain recent levels of return on equity (ROE), as the challenging environment impacts profitability causing re/insurers to reduce their ROE targets, according to a recent survey.

The non-life reinsurance industry has been running on reserves in recent years. With large catastrophe losses notably absent and prior year reserve releases buoying results by 5% to 8%, perhaps the recent strong performance of reinsurers is a mirage?

As the reinsurance market becomes ever more competitive, as increasing amounts of third-party, lower-cost and ILS capital seek to access the market alongside excess-levels of traditional capital, expense management and all-round efficiency is growing in importance.