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Reinsurance capital continues to creep upwards: Aon Benfield

Global reinsurance capital continued to rise in 2017 as alternative capital funds reloaded, according to Aon Benfield.

Overall, reinsurance capacity inched upwards by 2 percent in 2017 to $605bn, despite the string of catastrophe events in the second half of the year.

Traditional reinsurance capital edged up by $2bn to $516bn while capacity from alternative capital providers rose by around 10 percent to $89bn.

The figures further support the view that hurricanes Harvey, Irma and Maria and the California wildfires were an earnings event rather than a capital event for the global reinsurance industry.


Aon Benfield said the 2017 cat losses cost the industry $136bn.

But the primary sector kept around two-thirds of the losses, according to the reinsurance broker, as a result of the high retentions maintained by insurers.

The US government also took a $20bn hit from the catastrophes, with agencies like the National Flood Insurance Program taking on huge claims from Hurricane Harvey.

The Aon Benfield Aggregate, a data set made up of 21 reinsurers, showed pre-tax profits at the companies dropped by 75 percent to $5.1bn in 2017.

The group's aggregate combined ratio increased by 12.7 points to 107.4 percent.

Favourable prior-year reserve releases and improved investment returns helped to spare reinsurers' blushes over 2017, with the 21 carriers still making a profit on average.

Investment income of $20.6bn and capital gains of $8.9bn helped to offset underwriting losses caused by the cat events.

Eight of the 21 companies reported increases in total equity, while the combined total equity of reinsurance firms monitored ticked up by 2.5 percent to $204bn.

Return on equity across the 21 reinsurers fell by 6.4 points to 2.0 percent for the full year, well below the five-year average of 8.5 percent. In 2011, the last year with cat losses on the same scale as 2017, the aggregate's return on equity was 4.4 percent.

Strong ILS market inflows

Aon Benfield noted that a record volume of cat bonds was issued in 2017.


Second-half nat cat losses for the alternative markets totalled around $15bn, with the losses mostly stemming from retrocession, low-lying reinsurance and aggregate covers, according to the broker. A further $5bn in collateral is estimated to be trapped after the losses.

Most of that lost or trapped capital has been replaced, the firm said.

"The willingness of investors to reload mitigated upward pressure on retrocession pricing at the January renewals," the report said.

One of the largest providers of fresh capital to the insurance-linked securities (ILS) market was the Canada Pension Plan Investment Board. The pension fund provided its Lloyd's carrier Ascot with $1bn to establish a new Bermuda-based reinsurer, Ascot Re.

Other ILS funds raised included Hannover Re's renewal of its K Cession vehicle and Neon's NCM Re initiative.

"Losses in the third quarter tested the market and institutional investors responded by showing renewed commitment to an asset class that has delivered relatively attractive, non-correlating returns over time," said the Aon Benfield study.

The report anticipates further growth in the ILS market over 2018. The reinsurance broker said the alternative capital market had passed the test posed by 2017 cats, removing any final doubts that exist about the sustainability of the ILS industry.

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