Navigating a Volatile Insurance Market – an Insurer, Re-insurer, and Investor Perspective

While the global market for insurance investment and reinsurance is often volatile, the current conditions are unlike anything that has been seen in the last 15 years.

The key issue is the growing disconnect between an abundance of investment capacity in insurance and reinsurance, and the pressure that investors are putting on insurers to improve their earnings.

Speaking at Aon’s Advanced Risk Conference 2018 in Melbourne, Aon’s chief operating officer for broking in Australia Ben Rolfe started by describing the current returns Aon is seeing from the US$75 billion it places into the market globally. Rolfe said while most geographies were experiencing reductions in premium and rates, the Pacific presents an anomaly, with rates trending 4% above global averages. Also notable is the D&O segment in Australia, which represents the fastest growing rate across the portfolio at 78%, with a price point that could overtake the US by the end of the third quarter.

In relation to the reinsurance market, Aon’s head of broking reinsurance solutions John Carroll described how while catastrophic events impacted returns in 2005 and 2011, in 2017 pricing was relatively flat, despite suffering US$130 billion market losses as a result of Hurricanes Harvey, Irma and Maria. He said this was due in part to capital levels being up by 30% on 2011, meaning the industry was well prepared to take the loss. At the same time, alternative capital had increased almost threefold from 2011 to 2017 and was now sitting at about 15%. This had played a significant role in driving prices down in the US.

Carroll added that the return on reinsurance capital is in decline, from the 15% – 16% that markets were making the in the mid-2000s, down to 8% in 2016. This meant reinsurers were only just making back their cost of capital and did not leave enough to pay for catastrophic losses or generate profit in good years. But with alternative market providers happy to make smaller returns, Carroll said the industry as a whole was suffering inadequate underlying performance and would need to put up prices or cut costs. The alternative was to only focus on those areas that were most profitable, but this could undercut long term profitability by bringing more competition into these segments.

Macquarie Group insurance analyst Andrew Buncombe described how the local reinsurance markets had more capacity than it had ever had, thanks to hedge fund managers providing new capital. While international investors were comfortable with high volatility, as they viewed insurance as part of a broader asset portfolio, Australian insurance investors were still able to find reward through decreasing the amount of risk in their portfolios, leading to a higher price-to-earnings ratio that pushed up stock prices. Some were also buying more reinsurance, to take advantage of low costs, and in this way gained access to something closer to a fixed earning stream, which also helped share prices.

Buncombe pointed out however that while the target for investors in Australian insurers was 15%, Australia had not hit this figure in the past four years. It was however tracking in that direction, and the Australian general insurance market had achieved a higher return than London or the US market. In Australia most profits come from personal lines, where margins had been coming down, with home rate rises flattening to 1% or 2% or even decreasing in price thanks to competition.

Overall, Buncombe said the outlook for commercial lines was in the low single digit price rises, with high single digit rises in the commercial segment. Price reductions were also expected in online and direct channels, with relatively consistent pricing in the broker channel at low to mid-single digits.

While there might be an abundance of capacity in the reinsurance and insurance markets globally, with alternative providers happy to make lower returns than traditional reinsurers, investors will continue to put pressure on insurers to improve their earnings.

A snap poll of the audience found that 72% believed their insurance spending would increase next year, and just 11% expected it to decrease, indicating the next 12 months could be challenging for those managing large diverse insurance programs.

For more information on how Aon can help you manage a volatile insurance market, contact Ben Rolfe , or your regular Aon contact.