The Intelligent Quarterly from the publishers of The Insurance Insider

Winter 2017 / 2018

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Four years of good luck

Keith Wolfe

Things aren't always what they seem, which is an understatement when one considers the overall health of the reinsurance sector.

The good luck we had with natural catastrophes is over and it's forcing the industry to acknowledge that things are in a state of disrepair or, at the very least, disarray.

A glance at reinsurers' reported returns on equity since 2012 wouldn't seem like cause for alarm - they were in the 10-15 percent range - but that's dangerously misleading.

When all factors are taken into consideration, normalised returns were well under 10 percent in each of those years - which is a problem, since that level of return is lower than the average cost of capital.

Until recently, good performance in property markets was masking a lot of underlying issues. Companies, in many cases, made money because they were lucky; the catastrophes didn't happen.

In reality, the industry wasn't properly rating coverage for catastrophes during this benign period, and now those inadequate decisions have come full circle as Harvey, Irma and California wildfires prompt serious reconsideration of loss projections.

The warning signs have been present for some time: low-severity cat years, a challenging auto market and low interest rates. Unwillingness to heed these signals and their implications is like harbouring false hope. It's been too easy to ignore the signals when capital is abundant. The cost of capital has decreased every year since 2014 because smart investors know a good thing when they see it. They'll place generous bets in a low-frequency cat period, which can leave (re)insurers feeling satisfied with the status quo for pricing.

Global capital and a steady flow of money into the reinsurance and insurance sectors have created an environment where insurance companies could pay less for their reinsurance and therefore sell their own products for lower prices as well.

Nobody's immune when the global capital base is challenged like it has been this year. Everyone along the value chain is part of the equation.

Insurance companies would be well advised to review their buying behaviours over the last several years - and consider the partnerships they've had with reinsurers and address what inevitable economic pressures and changes to the capital base might mean for them.

At Swiss Re, we envision a more resilient world and our mission is to help make it so. But in order to be successful, we need to examine our own fundamentals and make sure we're sound for the long haul, or else that resiliency will be elusive.

Keith Wolfe is president of US P&C - Regional & National, at Swiss Re.


This article was published as part of issue Winter 2017

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