Total capital dedicated to reinsurance grew by 7% to reach $658bn (£490bn) last year worldwide, while there were also signs of an underlying improvement to the industry's combined ratio.
That is according to new research by Willis Re, which said that the increase in capital was driven primarily by strong investment market appreciation in the second half of the year.
Capital was raised by both incumbents and new entrants, however, returns to shareholders exceeded those new investments.
After analysing the financial results of a subset of 17 reinsurers, the researchers found that their combined ratio deteriorated from 100.6% in 2019, to 104.1% in 2020, due entirely to COVID-19 loss reserving.
However, on an underlying basis – normalising COVID-19 and natural catastrophe losses and excluding reserve releases – the combined ratio improved from 103.1% to 100.7%, which was the first full-year improvement since at least 2014.
James Kent, global CEO of Willis Re, which is the reinsurance business of Willis Towers Watson, said: “Such a solid development of the global reinsurance industry’s capital base would hardly have been expected earlier last year, as the COVID-19 pandemic was gathering pace.
“Willis Re’s analysis provides clear evidence of the strength and resilience of reinsurance market capacity.”
Despite these positive sentiments, the latest figures also show that the reinsurance industry's return on equity (ROE) remains under pressure.
The subset of 17 companies’ reported ROE fell from 9.7% to 2.7% last year, and the underlying ROE also fell from 3.2% to 1.3%.
The underlying deterioration was due to declining investment yields more than offsetting the better underlying underwriting performance. On both a reported and underlying basis, the ROE remained well below the industry’s cost of capital.
“Reinsurers and insurers alike must contend with the challenges of low interest rates,” Kent continued.
“But, looking through the turbulence of COVID-19 and nat cat claims, and a declining reliance on reserve releases, there is a clear improving trend in underwriting profitability.”
Image credit: iStock
Author: Chris Seekings