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Jul 2024

Reinsurers' earnings challenged by declining asset values

Source: Asia Insurance Review | May 2023

The hardening of the P&C reinsurance market has brought strong premium growth for reinsurers globally. However, a challenging investment environment has impacted asset values and return on equity.
By Nadhir Mokhtar
Costly Nat CAT losses have impacted reinsurer’s underwriting performance over the past year. However, most reinsurers have managed to report underwriting profits which were driven by compounding rate increases and diversification away from CAT-exposed classes said an Aon reinsurance market report covering the financial disclosures of 37 P&C reinsurers.
Asset values of the reinsurers have fallen due to stock market volatility and sharp interest rate hikes which have resulted in weak investment returns. Return on equity averaged 3.3% according to the report but turned negative including all unrealised losses. However, comparison across the market is problematic due to different reporting approaches by the companies said Aon.
Rising interest rates have also caused mark-to-market losses on bonds for reinsurers, leading to declining equity. Capital adequacy under ratings agency models has come under strain and the market has seen a -17% equity change according to Aon.
Underwriting performance remained resilient with a 96.8% underwriting net combined ratio. Aon said prior year reserves developed less favourably overall due mainly to the impact of loss cost inflation. Reinsurers also experienced strong premium growth due to rate increases with 13% growth in gross premiums written. The broker said reinsurance stocks have also done well with 16% stock outperformance, reflecting increasing optimism from investors around future pricing.
Renewal season in Asia Pacific
Rates on loss free risk and CAT programmes in Southeast Asia and China varied between an increase of 15% to 20% after risk adjustments according to Gallagher Re’s 1st View report. The report noted larger increases in Taiwan and Korea. However, deductible increases in Asia have been inconsistent as they were primarily imposed on loss impacted placements. Regional retrocession deductibles increased significantly and saw price increases across the board.
Late renewals
The renewals in Australia concluded late with few reinsurers willing to provide quotations, according to Gallagher Re. There was continued pressure on increasing CAT retentions with limited appetite for low of frequency layers. Some reinsurers also sought to rebalance Australian CAT portfolios and reduce exposures but did provide support to clients with broader relationships. Reinsurers continued to push pricing as well. Terms and conditions for treaty in Australia remained mostly stable with no significant changes.
Renewals in China were very late due to more rounds of negotiations with cedants and leaders. Cedants continued to make concessions to reinsurers despite better 2022 treaty results than previous years. However, Gallagher Re said the reinsurance market in China hardened despite no severe events occurring and most programmes remained free from losses. Reinsurers also gave quotations that far exceeded buyers’ expectations leading to very late firm orders and placements.
Impact of loss activity on renewals
Significant claims over the past year in South Korea have resulted in hardening prices and reinsurers exiting the market entirely, according to Gallagher Re. Reinsurers were only willing to offer quota share support going forward with most surplus structures disappearing. Renewals in the country have seen the introduction of broad sliding scales of commission, loss participation clauses and loss ratio caps. Gallagher Re said there was an introduction of new co-insurance limitation clause which limits the treaty capacity in case of co-insuring and underlying risk with one of more primary insurers. The excess of loss pricing hikes varied depending on individual contract loss position.
Malaysia experienced similar market reactions as previous renewals in April and July with 1/1 buyers renewing for the first time since the Malaysian flood according to Gallagher Re. Loss participation clauses have been introduced in the country, most of which are triggered at 100% loss ratio with cedant participation between 30% to 50%. The excess of loss pricing also increased depended on loss record. However, deductibles remained unchanged despite some cedants choosing to increase to manage costs.
Shifting capacity overseas
Indonesia’s reinsurance market is seeing some insurers moving capacity overseas due to financial issues with domestic reinsurers. Local major reinsurers pushed through an overall increase in pricing and tightening of proportional terms and reduced reinsurance commission at the same time according to Gallagher Re.
Pricing increases for excess of loss varied considerably depending on clients and results – some of which increased insignificantly.
Divergence in risk appetites
Probable maximum loss (PML) for reinsurers globally have also moved higher due to equity drops on unrealised investment losses according to a Moody’s reinsurance report. PML exposures have increased significantly above previous year figures due to reductions in equity capital as well as increased capital deployment by some firms said the agency.
In the past few years, some reinsurers show an upward trend in PMLs since property CAT pricing bottomed out in 2017 to benefit from higher pricing. In contrast, Moody’s said both Everest Re and AXIS Capital have significantly reduced their catastrophe exposures as a percentage of equity capital over the years to reduce earnings volatility.
Large incurred catastrophe losses increase liquidity risk at firms with outsized unrealised losses on investments. Reinsurers have sustained large unrealised losses on fixed income investments because of the sharp rise in interest rates. In general, P&C (re)insurers have good liquidity relative to their extended liability pay-out structures.
Reinsurance outlook
The ratings agency said a very large, severe catastrophe event (or series of large events) over the next year could result in higher liquidity risk for firms that have outsized unrealised investment losses.
It expects the upcoming renewal periods to be strong as several factors support continued upward pricing pressure. Further details on pricing trends in 2023 and reinsurers’ CAT risk exposure profiles are likely to be shown at the upcoming April renewals in Japan and the June/July renewals in Florida.
“We think property catastrophe reinsurance pricing could rise further. Weak sector profitability in recent years from above average catastrophe losses, inflationary pressures, a focus on the impact of climate change on catastrophe event frequency, strong demand from ceding companies and tight supply conditions in the collateralised retrocessional market all point to higher pricing in the months ahead,” said Moody’s. A 
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