James Kent, CEO of Willis Re is favorable on what the data shows, stating, “Reinsurers and insurers alike need to compete with the challenges of low rate of interest. Looking through the turbulence of COVID and nat cat claims, and a decreasing dependence on reserve releases, there is a clear enhancing pattern in underwriting success.”
The underlying results of the subset of standard reinsurance market players remains less than excellent, with the return on equity (RoE) decreasing further and continuing to fall well below the markets cost of capital.
There are indications firming reinsurance rates is driving much better underlying performance, however the fact returns stay depressed are possibly a sign of the inspiration to sustain this firmer pricing at future renewals.
As weve said before though, the question remains as to whether rate boosts alone suffice to improve core metrics such as the combined ratio and return reinsurers to a level of underlying profit that beats the industrys cost-of-capital.
Or whether other things need to alter in the reinsurance company design to make this occur and provide ROEs that cover those capital costs.
The cost of reinsurance underwriting capital is, obviously, a factor in reinsurers failure to cover it.
As an outcome, the growing use of third-party capital within reinsurance organizations looks likely to persist, as this can assist to lower general cost-of-capital for reinsurers, while also earning extra income that can further help these metrics.
The underwriting performance of reinsurance companies tracked by broker Willis Re improved in 2020, with the group reporting the first full-year improvement in normalised combined ratio because a minimum of 2014, albeit still over 100. Nevertheless, sensible or underlying returns on equity (ROE) of the subset of worldwide reinsurance firms Willis Re tracks the efficiency data of decreased substantially, falling well below the markets cost-of-capital again.
Two times a year, Willis Re analyses a subset of the global reinsurance market, conducting an extensive examination of the outcomes of 17 reinsurers.
While the reported combined ratio of these reinsurers worsened from 100.6% in 2019 to 104.1% in 2020, the reinsurance broker notes that this was due completely to COVID-19 pandemic associated loss scheduling.
On an underlying basis, so with outcomes normalised for COVID-19 and natural disaster losses and omitting any reserve releases, the combined ratio actually improved, from 103.1% to 100.7% for 2020.
Willis Re notes that this is the very first full-year improvement in the subset of reinsurers underlying combined ratio since at least 2014.
Part of this improvement is down to the firmer reinsurance prices environment it seems, with Willis Re stating that, “Pricing improvements, both at the underlying main insurance coverage and reinsurance levels, are now being shown.”
The broker included, “Reinsurers likewise benefited to some extent from the lower claims frequency seen in a number of lines of organization.”
While a decrease in the expense ratio, down to the most affordable level seen given that 2014 at 30.2%, will likewise have been a factor.
Naturally, the decrease in the cost ratio has been significantly helped by strong premium growth that exceeded cost development, with the subset reporting development in premiums of 9% typically, helped by the strong prices environment.
Despite these enhancements though, Willis Re also reported that return on equity (ROE) remains under pressure for reinsurers.
The reported ROE of the subset of reinsurers Willis Re tracks fell from 9.7% to 2.7% for 2020, while the underlying ROE also fell from 3.2% to 1.3%.
The chauffeur of the decline in underlying ROE was the decrease seen in financial investment yields, which more than balance out the groups improved underlying underwriting performance, Willis Re stated.
As a result, on both a reported and underlying basis, the ROE stays well listed below the markets expense of capital, the broker discussed.