GLOBAL P/C RE IICRA REPORT
competition is also intense in most other lines of business, as rates decrease on excess- of-loss covers and ceding commissions rise on pro-rata treaties.
Return on equity (neutral) We view the prospective profitability of the
global P/C reinsurance sector as neutral. The global P/C reinsurance sector generated an average ROE of 14% during the past five years (2009–2013). In addition, the industry produced an average combined ratio of 91.9% during the same period. We expect low interest rates to continue to put pressure on
Table 3: Global P/C Reinsurance Earnings Forecasts (%)
2009 2010 2011 2012 2013 2014f 2015f Loss ratio
Combined ratio Return on equity
56.8 62.1 14.1
86.8 92.6 105.6 22.2
75.1 57.0 53.0 60-65 62-67 88.1 86.4 95-100 98-104 14.4
5.2
f = Forecast Table 4: Real GDP Growth Or Contraction
U.S.
Eurozone Germany France Italy
Spain U.K.
Switzerland Brazil
Mexico
Australia China Japan
Singapore Turkey
2013 1.9
(0.4) 0.4 0.2
(1.9) (1.2) 1.7
2.0
2.5* 1.1*
2.7* 7.7* 1.5* 3.9* 4.0*
(% change, year-over-year) 2014f 2.3 1.1
1.8 0.7 0.5 1.3 2.9 2.2 1.2 2.7 2.7 7.2 1.8 3.9 2.4
f = Forecast. *The World Bank GDP Statistics. Source: Standard & Poor’s economic forecasts 72
2015f 3.1 1.6 2.0 1.4 1.1
1.8 2.5 2.5 1.2 3.5 2.8 7.2 1.3 4.2 2.7
14.1 7-9
Five-year average
(2009-2013) 60.8
7-9
91.9 14.0
reinsurers’ investment yields in the coming years. In 2014, we expect the reinsurance sector to generate a combined ratio of about 95%–100% and a ROE of 7%–9%. During the past five years, investment returns have contributed to the sector’s ROE, but the contribution has been diminishing because of persistent low interest rates. The reinsurance sector’s operating results benefited from strong underwriting cycle management and strong results in benign catastrophe years. Partially offsetting these strengths are significant volatility in operating results in above-average catastrophe years and significant reliance on prior years’ favorable reserve releases to bolster earnings (see Table 3).
The favorable prior-year developments have come largely from the latest set of hard market years (ie, 2002–2005) for casualty reinsurance. We believe that the remaining redundancies associated with these hard market years are limited and, as a result, we expect the ongoing benefits to decrease relative to the past few years.
Reinsurers’ overall strong enterprise risk management (ERM) capabilities have helped them manage their risks and generate strong earnings, as evidenced by their resilience to natural and man-made catastrophes and financial crises during the past decade. However, reinsurers’ ERM capabilities will face some tests in 2014, particularly with regard to underwriting controls and strategic risk management. With the continuation of rate decreases in property catastrophe and other lines of business, relative risk-adjusted returns for various risk exposures will shift. This could force reinsurers to implement some strategic changes based on the guidance of their ERM functions. Furthermore, as the market softens, the pressure on underwriting, catastrophe, and reserving risk controls will grow. This year we could see which carriers’ ERM frameworks actually translate into tangible actions.
Product risk (negative)
Due to the inherent volatility in many P/C products that ultimately affects ROE, we view product risk as negative. That’s because the P/C reinsurance sector often serves as a backstop for high-severity P/C risks—such as catastrophe risks—from the P/C insurance sectors. To cope with these risks, global reinsurers tend to be strongly capitalized and maintain sophisticated ERM programs.
Global Reinsurance Highlights 2014
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