Last year saw a 3.5 percent reduction in traditional capital dedicated to reinsurance, according to Willis Re.
Willis Re’s Reinsurance Market Report found that traditional capital fell $13 billion from $370 billion in 2014.
The decline in traditional capital was offset by the continued growth in non-traditional capital, which hit new heights of $70 billion. In total, global capital dedicated to reinsurance now stands at $427 billion.
According to the report, which is based on the Willis Reinsurance Index, the continued focus on active capital management is the main driver behind the fall in traditional capital as opportunities for acceptably profitable capital deployment remain challenging.
The decrease in traditional capital is also a result of unrealised investment losses and the strengthening of the US dollar against the euro.
The record volume of mergers and acquisitions activity in 2015 was also a key driver. For companies within the index, these factors accounted for a reduction of approximately $20.9 billion.
However, despite the decline, capital oversupply remains a fundamental industry challenge and market pressures continue to manifest themselves in diminishing return on equity.
According to the report, companies within the index providing catastrophe loss and prior-year reserve release disclosure continue to show a seemingly healthy aggregate reported return on equity of 10.2 percent, down from 11.5 percent in 2014.
A significant rise in expense ratios over several years is a major factor eroding return of equity. As the report highlighted, expense ratios for the subset have risen by approximately four percentage points to 33.1 percent between 2007 and 2015.
The report found that in 2015 alone expense ratios increased by one percentage point. This comes as reinsurers continue to invest in underwriting and diversify their business portfolios. The increasing costs associated with enhanced regulation and governance is also affecting bottom lines.
John Cavanagh, global CEO of Willis Re, said: “Reinsurers continue to face a myriad of headwinds placing downward pressure on underlying results. However, headline figures remain robust and capital positions are strong—the dual saviours of reserve releases and low severity loss experience continue to underpin reported results.”
“Yet underlying RoEs are now beginning to breach minimum target thresholds. The pressure persists with capital remaining at record levels amidst the continued influx of capital from non-traditional sources.
“Given the current climate, the broadening of reinsurer business models is proving a successful strategy for many and increasing relevance to clients, despite the impact on expense ratios. But ultimately, reinsurers will yet again be looking to another below average loss year to maintain acceptable results.”
