Capacity continues to outpace the growth of reinsurance demand despite insurers’ continued efforts to optimize their view of reinsurance as capital and expand into growing lines of business and innovation, according to a report published by Aon Benfield.

The report reveals that reinsurance capital continued to climb to new highs, increasing 5.3 percent to US$595 billion through nine months at Sept. 30, 2016.

While traditional reinsurance capital increased by 4.7 percent to US$517 billion over the nine months to Sept. 30, 2016, alternative capital increased by only 9.6 percent to US$78 billion, which is the smallest growth reported in five years, said the report titled “Reinsurance Market Outlook – Record Capacity Sufficient to Meet Current Demand Increase and Future Innovations.”

This suggests “that traditional capacity is using all the tools at its disposal in order to stave off market share growth from alternative capital,” the report said.

Demand Rises in Selected Regions, Lines

Overall reinsurance demand did increase during the January renewals, but it has been isolated to a few regions and lines of business, said Aon Benfield.

“For January 2017 renewals, some insurers in the US and Europe looked to secure additional property catastrophe capacity as terms and conditions continued to move in their favor and/or they looked to meet new regulatory requirements and evolving rating agency thresholds,” said the report.

Growth in new lines such as mortgage and cyber continues, while reinsurance demand was stable in regions with low primary insurance penetration, the report continued.

Further, Aon Benfield said, insurers in a number of global regions also looked to increase the proportion of protection provided on a multi-year basis, facilitated by reinsurers that looked to lock in participations.

Insured catastrophe losses ended 2016 at US$53 billion, slightly above the 10-year average for the first time since 2012 and sixth in insured catastrophe loss activity over the last 25 years, the report affirmed.

“As we look to future 2017 renewals, the pick-up of M&A activity in Q4 2016 and potential interest rate increases could signal potential capacity restrictions,” said the report. “Our expectation is that these impacts will be slow to manifest and enough excess capital remains in the market to continue the trend for better terms and conditions for insurers seen at January 2017.”

Other findings in the Aon Benfield report include:

• The average combined ratio among the 20 Aon Benfield Aggregate companies reporting nine month results was 90.9 percent, up from 88.4 percent in the same period of the prior year.
• Return on equity stood at 9.1 percent, down from 10.2 percent previously, despite material support from unrealized gains.
• Alternative capital focused on collateralized reinsurance, rising by 9.6 percent to US$78 billion. Conversely, new issuance of catastrophe bonds fell to US$6.0 billion, from US$6.9 billion in 2015. The 2016 drop was mainly due to the fact that some maturing catastrophe bonds did not renew.
• Regulatory developments and capital availability resulted in the creation of new reinsurers in rapidly developing markets such as China and India. These soon-to-be-launched reinsurers include Qianhai Re, Nine Merchants Re and ITI Re. At Lloyd’s, four new syndicates will start underwriting this year, all backed to some extent by traditional Lloyd’s Names.
• After a relatively subdued first nine months, corporate M&A activity in the specialty insurance and reinsurance markets returned strongly in the fourth quarter of 2016. Further consolidation is expected in 2017, given current market dynamics

Source: Aon Benfield