Capital dedicated to reinsurance continued to grow in 2017 despite catastrophe losses. Due to ongoing excess supply and overall market resilience at 1 January, rate firming was generally moderate and pricing shifts focused on client-specific justification, according to an analysis released yesterday by Guy Carpenter & Company, a leading global risk and reinsurance specialist and a wholly owned subsidiary of Marsh & McLennan Companies.
Guy Carpenter’s estimate of dedicated reinsurance capital, completed in conjunction with A.M. Best Company at year-end 2017, is approximately US$427 billion, up 2% from year-end 2016. While traditional capital is flat, convergence capital grew by 9% to $82 billion including replacement of lost or trapped capital. Guy Carpenter and A.M. Best’s estimate of traditional capital is calculated using A.M. Best’s proprietary capital model (BCAR) results as well as line of business allocations.
Last fall’s concentrated period of events, including four land-falling hurricanes—Harvey, Irma, Maria and Nate—of which the first three were Category 4 or greater, helped make 2017 the third year on record with insured catastrophe losses over $100 billion. Guy Carpenter's current estimate of $113.5 billion in insured loss excludes the NFIP, which does not significantly impact industry capital or profitability. The estimate also accounts for recent decreases in some estimated losses.
“Despite substantial catastrophe losses in 2017, the market demonstrated significant resilience with no notable capital withdrawal and moderate price increases. Evolving market dynamics and innovative reinsurance solutions serve to mitigate significant loss events and protect industry capital and profitability,” said Mr David Priebe, Vice Chairman, Guy Carpenter. “The reinsurance and capital markets responded favourably to those companies which were able to present quality data and well developed and executed loss mitigation strategies. These measures support companies’ ability to attain customised risk transfer solutions and maximum protection for their risk profiles.”
In most lines, loss-impacted policies or those with thin margins were most likely to see price increases. The Guy Carpenter Global Rate on Line Index, measuring the change in catastrophe premiums year over year, increased by 6.1%. This was driven by the impact of large loss activity and exposure growth, as reinsurers’ focus on flat risk adjusted pricing led to higher premiums for increased exposure. Unlike past firming events where supply and demand imbalances and shifting views of risk drove rates higher, the 2017 events were largely within model parameters, and overall industry capital did not decline. Assessment of the market response will continue through the spring, when many of the most heavily loss-impacted programs renew.
The analysis also reviews reinsurer profitability, noting reinsurers have leveraged retrocession coverage more aggressively in recent years, supported by the use of convergence capital. This helped avoid a negative return on average equity (ROAE) for the Guy Carpenter Global Reinsurance Composite, a representative sampling of carriers in the sector, as of the third quarter. Despite the erosion of profits from the first half of the year by third quarter losses, the 10-year weighted average ROAE is 8.1% – a figure including two of the three costliest catastrophe years on record. While reinsurers exercised greater caution in deploying capital at 1 January, there was no indication markets’ support of the sector was diminished.