Reinsurers across the globe are facing double whammy with the decline of dedicated reinsurance industry capital as well as declining profits amid fierce competition.
The revelation was made by Willis Re, the reinsurance business of global advisory, broking and solutions company Willis Towers Watson.
According to Willis Re’s latest Reinsurance Market Report the reinsurance industry’s dedicated capital declined by 5% to $462bn in 2018.
The report highlights that the biggest chunk of the $462bn total is the total shareholders’ equity of the 32 reinsurance companies tracked in the Willis Reinsurance Index, which was down 10% to $335.7bn, reversing the 8% growth witnessed in 2017.
The acquisition of Validus by AIG and XL Catlin by French insurer AXA, contributed to a $13.7bn decrease in Index capital.
Additional factor which contributed in reducing the Index capital by $17.6bn was payment of dividends and buy-backs by reinsurers during 2018. Nearly $20.5bn of net income was used for this purpose.
Willis Re Global CEO James Kent said: “Overall shareholders equity figures for the Index suffered a negative impact due to unrealised investment losses, owing to external factors largely beyond the control of risk carriers, as well as shareholder buy backs and dividends.
“The report’s findings show that the remedial actions taken by many risk carriers in 2018 were essential and we are seeing an acceleration of these actions in 2019 as companies seek improved underwriting terms and rates to drive RoEs.”
Profitability on downward spiralling
The report further highlights that some of the world’s biggest reinsurers have witnessed their profitability decline by more than half over the past five years.
The decline in profitability can be attributed to cut-throat competition, increase in operational expenses and catastrophe losses.
The annual return on equity at some reinsurers decreased from 6.7% in 2013 to just 2.7% in 2018, after taking out the impact of major natural catastrophes, according to Willis Re report.