The 2018 reinsurance renewal

The 2018 reinsurance treaties' renewal is playing out under a new look. It is the first time in 15 years that reinsurers are considering a reversal of tariffs.

The year 2017 has been characterized by a high number of major claims which occurred after an already difficult 2016. Following the natural catastrophes that hit the Caribbean, Mexico and Southeast United States in the course of the third quarter, the market is scrutinizing the response of reinsurers. Will the latter have the necessary resources to toughen the terms of treaties' renewal? Is the capacity provided to ceding companies in adequacy with their needs? These are the questions that this focus tries to answer.

Reinsurance renewal 2018: key figures

Evolution of reinsurance turnover

After an average annual increase of 5% between 2008 and 2014, that is, six years in a row, the reinsurance market sustained a premium reduction of 2% in 2015 before shrinking once again by 4% in 2016. The non life class of business is behind this slowdown.

Evolution of global reinsurance turnover: 2005-2016

* Estimates Source: Standard & Poor’s

According to the figures provided by A.M. Best, Swiss Re, which reported 35.6 billion USD of premiums in 2016, snatched the world’s number one ranking from Munich Re which comes in second position with 33.2 billion USD, followed by Hannover Re (17.2 billion USD), SCOR (14.6 billion USD) and Berkshire Hathaway (12.7 billion USD).

The combined market share of the first five reinsurers has more than doubled between 1990 and 2016, rising from 23% to 50% during the interval in question.

Evolution of market shares between 1990 and 2016 (in %)

Source: SCOR’s estimates

With 68.8 billion USD in 2016, the first two groups of reinsurers, alone, account for 30% of global life and non life premiums. During the same year, the world’s top ten reinsurers accounted for 67% of the premium volumes, that is, 154.6 billion USD. These figures and percentages confirm the growing shortage in risk diversification. This concentration is inconsistent with the core principle of reinsurance whose main driver is risk mutualization and atomization. This traditional role of geographical distribution of risks is now being questioned. Reinsurers’ panel is decreases and hence, increases counterparty risks.

Evolution of technical results

The year 2016 reported a high level of natural catastrophes, close to the historical average. The increase of this kind of losses in the previous year nears 40%.

Major natural catastrophes in 2016

in billion USD

Date	Country	Event	Number of victims	Insured losses (1)
April 2016	Japan	Earthquake	137	4.9
October 2016	United States, Caribbean	Hurricane Matthew	734	4
August 2016	United States, Louisiana	Storm and floods	13	3.1
April 2016	Canada	Hail storm	-	3
May 2016	Europe	Storm and floods	17	2.9
May 2016	Canada	Fort McMurray forest fires	-	2.8
November 2016	New Zeland	Earthquake	2	1,7 à 2,4

Source: Sigma

Evolution of combined ratio: 1992-2016

After a challenging year in terms of catastrophes, the 2016 reinsurance year exhibited a combined ratio close to 100%. This median estimate is based on a bracket between 97% and 102%. This 100% rate is 7 points above the one reported in average during the 2007- 2015 period (93%). The decade comprised between 1997 and 2006 had also been marked by a high combined ratio, with the latter attaining an average of 106%.

*Estimates Source: S&P Global Reinsurance Highlights

In 2017, the outlook remains negative. Indeed, the exceptional loss experience reported during the third quarter of 2017 has been coupled with a regulatory change in Great Britain. The entry into force of the new claim reserving system of bodily injuries' claims is poised to compound the misery of insurers by 3 to 4 billion GBP (3.9 to 5.1 billion USD). The combined ratio for the current year will most likely be higher than that of 2016.

Evolution of the top 25 reinsurers’ combined ratios: 2015-2016 ⁽¹⁾

⁽¹⁾ Ranking per 2016 turnover

Reinsurers’ profitability

The fierce competition among non life reinsurers has since 2003 triggered a decrease of profitability for the market’s major players. This competition is accounted for by steadily-rising alternative reinsurance capacity.

Another challenge hindering reinsurers is the lingering low interest rates which has considerably reduced the return of their investments.

According to rating agencies, both factors stand as a serious obstacle hindering the search for return that exceeds capital costs. In the first quarter of 2017, Standard & Poor’s noted that this return was only 1.2% above the sector’s capital cost.

In 2016, return on capital was set at 8.6% while its cost reached 6.5% for the same year. The current year is poised to undergo a notable decline of capital return due to tariff decreases that have dragged on throughout the year.

Reinsurers have so far managed to come to grips with declining profitability thanks to a reserve release policy. It is because of the level of natural catastrophes' losses which has not been excessive, except for 2011, that reinsurers managed to counter-balance the results under pressure by release of reserves. A similar policy will be hard to pursue in order to conceal the losses in view of the loss experience peak that occurred in the summer of 2017.

As of 2006, the amount of reserves released by major non life reinsurers has grown steadily until 2011, the year hardest hit by natural catastrophes. These amounts have stabilized ever since around 7 billion USD per year.

Reserves released by the top 20 non life reinsurers ⁽¹⁾

⁽¹⁾Including direct non life insurance Source: Standard & Poor’s

A 5-year average ROE, excluding loss reserve development

The diagram here below establishes the link between average profitability of shareholders’ equities of major reinsurers for five years and their policy of reserve release over the same period. It determines the massive use of this accounting process which is designed to inflate the ROE. This seems to be particularly the case of Partner Re or Endurance whereas groups such as Everest, SCOR, Hamilton Re, Maiden Holdings and Greenlight hardly make any recourse to this process.

It is undoubtedly true that reinsurers whose reserve policy is conservative will be better positioned to contain the effects of claims emanating from natural catastrophes events having occurred in 2017. The same rationale shall also apply in order to reduce actuarial adjustment impact for bodily injuries' claims in Great Britain.

Reinsurance renewal 2018: the market’s overall capacity

By the end of 2016, reinsurance capacity was estimated at approximately 595 billion USD by Aon Benfield and at 420 billion USD by Guy Carpenter and AM Best. These sums include alternative capital whose trace in non life reinsurance is undeniable. While traditional capacities have remarkably increased, the growth of alternative reinsurance has been even more notable as it has almost gone twofold since 1998.

Constantly growing, alternative capital accounted still according to Guy Carpenter and AM Best, for nearly 75 billion USD by the end of 2016, with a new record amount expected to be attained in 2017. For the record, Aon Benfield has estimated this amount at 86 billion USD by the end of March of the ongoing year for a global capacity of 605 billion USD. Risk-backed securities and catastrophe bonds account for about 85% of the sums at stake.

For several years, the relative leniency of natural catastrophes up to June 30, 2017, has enabled holders of this kind of assets to obtain attractive returns.

Estimate for total reinsurance capacity

in billions USD Source : A.M. Best and Guy Carpenter

Alternative capital composition as of 31 March 2017 (86 billion USD)

Source: Aon Benfield Analytics

Merger-acquisition activity

The search for scale economy, in a particularly-lively competitive context, makes good sense for non life reinsurers, especially that merger-acquisition operations are stimulated during periods of capital abundance. In the course of recent years, the reinforcement of ERM (Enterprise Risk Management) policies, the low levels of catastrophic claims and the stability of reinsurers’ ratings have prompted consolidation moves.
The impact of consolidation moves on reinsurers’ ratings has not been prejudicial to the players who carried out acquisitions:

Outlook on acquirers upon announcement of acquisition

Outlook on acquirers 6-14 months after announcement of acquisition

Source : Aon Benfield Analytics

While a large number of transactions saw the light of day in 2016 (Ace/Chubb, Tokio Marine/HCC, Exor/Partner Re, Mitsui/Amlin, XL/Catlin, Fairfax/Brit, Willis/Towers Watson), the trend has particularly slowed down in 2017. This pause has been accounted for by the following reasons:

• the number of quality target reinsurers has declined,
• the market capitalization of players is now on a high bracket,
• particularly competitive environment restricts visibility, especially the identification of reinsurers able to maintain an attractive portfolio in terms of profitability,
• the high loss experience during the 2017 summer season has induced players to shift their attention to financial results.

However, the significant increase of natural catastrophes' loss experience during the recent months may, very soon, pave the way for new concentrations. SCOR, relatively spared by recent events, has not ruled out the prospect of consolidation should this opportunity come up.

Merger and acquisition deals: July 2017- November 2014

in millions USD

Announced transaction	Closed transaction	Acquirer	Acquiree	Purchase price	Terms of the transaction
July 2017	Ongoing	AXIS Capital	Novae Group	600	Cash
May 2017	Ongoing	Intact Financial Corp	OneBeacon Insurance Group	1 700	Cash
December 2016	July 2017	Fairfax Financial	Allied World Assurance	4 900	Stock and cash
December 2016	May 2017	Liberty Mutual Group	Ironshore	2 940	Cash
November 2016	April 2017	AXIS Capital	Aviabel Cie. Belge d’Assurances Aviation	NA	NA
November 2016	February 2017	Argo Group US	Ariel Re	240	Cash and debt
October 2016	April 2017	PartnerRe	Aurigen Capital	290	Cash
October 2016	March 2017	Sompo	Endurance Specialty	6 300	Cash
September 2016	December 2017	Canada Pension Plan Investment Board	Ascot Underwriting	1 100	Cash
August 2016	January 2017	Arch Capital Group	United Guaranty	3 400	Stock and cash
April 2016	November 2016	AmTrust Financial Services	ANV Holdings B.V.	200	Cash
September 2015	February 2016	Mitsui Sumitomo Insurance	Amlin	5 300	Cash
August 2015	January 2016	Sumitomo Life Insurance	Symetra Financial	3 800	Cash
August 2015	March 2016	EXOR	PartnerRe	6 900	Cash
July 2015	April 2016	China Minsheng Banking	Sirius International Insurance Group	2 600	Cash
July 2015	March 2016	Meiji Yasuda Life Insurance	StanCorp Financial Group	4 950	Cash
July 2015	January 2016	ACE Ltd.	Chubb Corp	28 300	Cash, actions et dette
June 2015	October 2015	Tokio Marine & Nichido Fire Insurance	HCC Insurance	7 530	Cash and debt
May 2015	November 2015	Fosun International	Ironshore	2 300	Cash
March 2015	July 2015	Endurance Specialty	Montpelier Re	1 830	Cash and stock
February 2015	July 2015	Fairfax Financial	Brit Insurance	1 880	Cash
January 2015	May 2015	XL Group	Catlin Group	4 100	Cash, stock and debt
November 2014	March 2015	Renaissance Re	Platinum Underwriters	1 900	Cash and stock
Total				93 050

NA: not available
^* Only major transactions are reported in the table above Source : S&P Global Reinsurance Highlights

Reinsurance reneweal 2018: tariff trends

The exceptional loss experience of the last quarter of 2017 will strain reinsurance treaties' renewal terms in 2018. These particularly destructive events are likely to impact reinsurance terms and conditions offered on January 1.

Within two weeks, hurricanes Harvey (Category 4), Irma (Category 5) and Maria (Category 5) have successively lashed the Caribbean, Mexico and Southeast United States claiming numerous lives and causing substantial material damage. Harvey’s passage to Texas has claimed the lives of 90 people and caused approximately 190 billion USD in economic damage.

With gusts up to 295 km/hour, Irma, on its part, claimed the lives of 120 people and caused economic damage that may amount to 120 billion USD. Hurricane Maria occurred one week after Irma, with wind gusts up to 280 km/hour, ravaging in particular Porto Rico where similar storms have not been witnessed since 1928. Economic damage has been estimated between 50 and 91 billion USD while the number of deaths amounted to 70.
Mexico has also been hit by cyclones and sustained two powerful earthquakes:

• September 7, an 8.2 magnitude earthquake claimed the lives of 100 people, causing substantial material damage .
• September 19, a second 7.1 magnitude earthquake claimed the lives of more than 360 people in the State of Puebla near Mexico.

According to reinsurer SCOR, the five events of last August and September will cost insurers and reinsurers approximately 95 billion USD. This amount is to be added to the 23 billion USD of natural catastrophes reported by Swiss Re for the first half of the year.

QBE has already announced that 2017 may be the most onerous year ever for the insurance business. With regard to natural catastrophes loss experience, only 2005 and 2011 may compare with 2017. In 2005, Katrina cost the market 80 billion USD (sums adjusted by the end of 2016). In 2011, the damage caused by the Japanese Tsunami amounted to approximately 40 billion USD.

Major insurers and reinsurers have published initial estimates of their commitments in the damage reported during the occurrence of the five major events at the end of the summer season.

Loss estimate of the main insurers and reinsurers following the occurrence of major events during the summer of 2017

in millions USD

Company	Country	Amount
Lloyd’s	United Kingdom	4 500
Swiss Re	Switzerland	3 600
Munich Re	Germany	3 200
AIG	United States	3 100
Chubb	Switzerland	1 780
XL Catlin	Ireland	1 480
Everest Re	Bermuda	1 200
Talanx Group	Germany	1 050
MS&AD	Japan	977
Zurich	Switzerland	700
Renaissance Re	Bermuda	625
QBE	Australia	600
Allstate Corporation	United States	593
Axis Capital	Bermuda	578
Markel	United States	503
PartnerRe	Bermuda	475
Universal Insurance	United States	450
Scor	France	430
Validus	Bermuda	412
Arch Capital	Bermuda	345
Aspen Insurance	Bermuda	310
Mapfre Re	Spain	237
Hiscox	United Kingdom	225
Hannover Re	Germany	225
Chaucer	Germany	135

Source: Atlas Magazine

With such an amount of losses reported in 2017, the market is logically poised to react and stiffen the terms of the 2018 renewal.

In North America, particularly in the United States, this approach has very good chances of being respected, with a rate increase justifying it.
Ceding companies on the European, Middle Eastern and African markets are in better situation than their American counterparts. These markets have been spared disaster claims in 2017.

The abundance of capacity provided in particular by numerous regional players will continue to support insurers, especially that retentions are not showing signs of decrease. In these areas, it is obvious that 2018 will be stable in terms of tariff erosion while the so long-awaited tightening by the market players will not be on the horizon for some time to come.