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Global
Reinsurance
Global
Highlights
Reinsurance2019
Highlights 2020
PUBLISHEDPUBLISHED
BY: B
PUBLIS
Global Reinsurance Highlights
2020 Edition
For further information, please visit our reinsurance page on our website www.spratings.com
Global Reinsurance Highlights | 2020 3
4 Global Reinsurance Peer Review
Contributors
For S&P Global Ratings For Intelligent Insurer
Project Leaders Data Team Publisher
Johannes Bender Patrice Mizeski, New York Nicholas Lipinski
Taoufik Gharib Antun Zvonar, New York Tel: +44 (0) 203 301 8201
nlipinski@newtonmedia.co.uk
Contributors Editorial Team
Aishwarya Agarwal, Pune Heather Bayly, London
Johannes Bender, Frankfurt Jennie Brookman, Frankfurt Managing editor
Craig Bennett, Melbourne Jo Parker, Toronto Wyn Jenkins
Rachit Chauhan, Mumbai Richard Smart, Tokyo Tel: +44 (0)203 301 8214
WenWen Chen, Hong Kong wjenkins@newtonmedia.co.uk
Hoyt Crance, New York
Charles-Marie Delpuech, London
Sub editor
Koshiro Emura, Tokyo
Giulia Filocca, London Ros Bromwich
Taoufik Gharib, New York
Robert Greensted, London Design & Production
Jean Paul Huby Klein, Frankfurt Garrett Fallon
Maren Josefs, London Russell Cox
Kalyani Joshi, Mumbai
Marc-Philippe Juilliard, Paris
Milan Kakkad, Mumbai Cover image:
Ali Karakuyu, London Shutterstock / Ellerslie
Olivier Karusisi, Paris
Saurabh Khasnis, Centennial
Eiji Kubo, Tokyo
Volker Kudszus, Frankfurt
Hardeep Manku, Toronto
Mark Nicholson, London
Dennis Sugrue, London
Eunice Tan, Hong Kong
Michael Zimmerman, Centennial
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Global Reinsurance Highlights | 2020 5
Contents
8 Soundbites
10 Reinsurance Outlook
Black Swan Or Not, COVID-19 Is Disrupting Global Reinsurers’
Profitability
18 Catastrophe Risk
Global Reinsurers Face Threat If COVID-19 Losses Are Followed By A
Major Catastrophe
25 Lloyd’s Of London
Turning The Supertanker: Underwriting At Lloyd’s Market Changes
Course
32 Protection Gap
COVID-19 Highlights Global Insurance Protection Gap On Climate
Change
37 IFRS 17
Reinsurers And IFRS 17: Getting Balance Sheets Ready And On Time
40 APAC
APAC’s Costly Catastrophes: Reinsurance And More Required
46 Investments
Investment Caution Has So Far Paid Off For Global Reinsurers
52 North American Investment Stress Test
COVID-19 Market Volatility Tests North American Reinsurers’ Resilience
59 Cat Bonds
In A Correlated Market, Catastrophe Bonds Stand Out
64 Top 40 By Company
66 Global Reinsurers By Country
76 Ratings Definitions
78 Addresses
6 Global Reinsurance Highlights | 2020
Foreword
COVID-19 Pushes Global Reinsurers
Further Out On Thin Ice
By Johannes Bender and Taoufik Gharib
2
020 will be remembered for many reasons. The global The Asia-Pacific region’s insurance and reinsurance sector
outbreak of the COVID-19 pandemic, greater investor focus has seen its fair share of weather-induced woes over the past
on environmental, social, and governance issues, the U.S. two years. In APAC’s Costly Catastrophes: Reinsurance And More
election, and a record number of natural catastrophes will all make Required, we discuss regional and global reinsurer’s appetite for
their way into the history books. For the global reinsurance sector, the region, and its main challenges and opportunities.
2020 was another tough year. Given that reinsurers exist to take on insurance risks, it is not
Because of significant pandemic-related losses, elevated surprising that they are more exposed to underwriting, reserving,
natural catastrophe claims, and lower investment returns, the and catastrophe risks than to investment risks. However, their
sector will again fail to meet its cost of capital. This follows three investment risk has never been negligible, and a decade of low
years in which the sector has struggled to meet its cost of capital interest rates and tough underwriting conditions forced reinsurers
due to large natural catastrophe losses, adverse loss trends to increase their appetite for investment risk. In Investment
in certain U.S. casualty lines, and fierce competition among Caution Has So Far Paid Off For Global Reinsurers, we take a
reinsurers. Consequently, in May 2020, S&P Global Ratings revised look at reinsurers’ asset risk appetite over time and how the sector
its outlook on the global reinsurance sector to negative from stable, would be affected by several stress scenarios.
as we believe business conditions are difficult. In COVID-19 Market Volatility Tests North American
In our lead article Black Swan Or Not, COVID-19 Is Disrupting Reinsurers’ Resilience, we conduct an investment asset stress
Global Reinsurers’ Profitability, we discuss why we revised the test for the region’s reinsurers, and outline the impact of the results
sector outlook to negative after the pandemic started and highlight on capital adequacy.
the sector’s main challenges and opportunities with regard to Financial markets have recently proved to be highly correlated,
pricing, growth, capital adequacy, and earnings potential. as the COVID-19 pandemic cut a swath through various different
Reinsurers have suffered significant natural catastrophe industries. S&P Global Ratings’ article In A Correlated Market,
losses in recent years. In Global Reinsurers Face Threat If COVID- Catastrophe Bonds Stand Out answers questions from market
19 Losses Are Followed By A Major Catastrophe, we examine participants about how the insurance-linked securities market has
how reinsurers’ risk appetite has changed, and how the sector been faring and what could happen as the pandemic continues.
has equipped itself to face future natural catastrophes and rising This year’s Global Reinsurance Highlights captures the key
COVID-19-related claims. issues facing reinsurance management, investors, and other
In Turning The Supertanker: Underwriting At Lloyd’s Market stakeholders. We hope you enjoy the 2020 edition and welcome
Changes Course, we take a closer look at Lloyds’s actions to your feedback on possible enhancements for future years.
improve underwriting performance, the prospects for individual
syndicates, and the market’s ambitious “Future of Lloyd’s” project. Johannes Bender
As the COVID-19 pandemic spread from region to region, it Frankfurt, (49) 69-33-999-196
has drawn attention to a hitherto unnoticed protection gap in johannes.bender@spglobal.com
insured and noninsured property/casualty risks. Although the
pandemic’s protection gap had not previously been recognized, Taoufik Gharib
other protection gaps have been raising concerns for some time. In New York, (1) 212-438-7253
COVID-19 Highlights Global Insurance Protection Gap On Climate taoufik.gharib@spglobal.com
Change, we analyze how reinsurers can help to close protection
gaps in life, health, cyber, and natural catastrophe insurance.
The implementation of International Financial Reporting
Standards (IFRS) 17 requires insurers and reinsurers—globally,
but excluding those based in the U.S.—to restate their balance-
sheet comparatives with new key metrics. In Reinsurers And IFRS
17: Getting Balance Sheets Ready And On Time, we discuss the
main challenges for reinsurers and users of financial statements
resulting from IFRS 17.
Global Reinsurance Highlights | 2020 7
Soundbites
Reinsurance Outlook
Taoufik Gharib, Johannes Bender, Hardeep S Manku, and Ali Karakuyu
• O nce again, the global reinsurance sector won’t earn its cost of capital in 2020, just as it has struggled to do so
in the past three years. Hence, our sector outlook remains negative.
• The top 20 global reinsurers reported about $12 billion in COVID-19 losses year-to-date. We now forecast that
this cohort will generate a combined ratio of 103%–108% in 2020 and 97%–101% in 2021, and a return on
equity of 0%–3% and 5%–8%, respectively.
• Sector capitalization remains robust with no material capital destruction so far, benefiting from capital raises
in 2020 and market recovery from March lows.
• Property and casualty reinsurance pricing has been hardening during the past 18 months in reaction to
natural catastrophe and pandemic losses, as well as alternative capital and retrocession capacity constraints.
We expect the reinsurance pricing positive momentum will carry into 2021.
• Life reinsurers are facing higher mortality losses caused by the pandemic, but the impact is manageable.
Catastrophe Risk
Charles-Marie Delpuech and Johannes Bender
• If 2020 sees insured catastrophe losses of $60 billion–$70 billion—an average level—at least eight of the top
20 reinsurers could suffer a capital event.
• The investment impact of COVID-19, combined with pandemic-linked losses, have eroded the top 20 global
reinsurers’ combined catastrophe budget and earnings buffer for a severe catastrophe event in 2020 to about
$14 billion, from about $32 billion.
• We expect those reinsurers less affected by COVID-19, which can afford to deploy capital, are likely to take a
more offensive stand at the next renewals, while others take a more defensive tack.
Lloyd’s Of London
Robert J Greensted and Ali Karakuyu
• T
he Lloyd’s market’s underlying underwriting performance is continuing to improve after 10 consecutive
quarters of re/insurance rate improvement.
• Syndicates have struggled to break even following several years of above-average natural catastrophe losses.
Mature syndicates have significantly outperformed less-established syndicates.
• We consider “The Future at Lloyd’s” blueprint to be ambitious, with a high degree of execution risk. That said,
success will ensure the market’s relevance.
Protection Gap
Olivier J Karusisi and Dennis P Sugrue
• T he pandemic has highlighted the need for governments to improve their economies’ resilience to big financial
shocks, like those associated with natural catastrophes and epidemic diseases. Government-backed
insurance solutions, supported by the (re)insurance industry, could protect government budgets, mitigating the
potential for economic instability.
• The insurance sector, especially reinsurers, has a wealth of data and experience in assessing evolving risks
such as climate change. This could enable governments, companies, and individuals to make better decisions.
• For reinsurers, helping to close the protection gap—the difference between insured and total losses—may
provide diversification of risk exposure and help to attract, educate, and develop new insurance markets that
can provide growth potential. Ultimately, it could reinforce reinsurers’ relevance for potential new clients.
IFRS 17
Volker Kudszus, Eiji Kubo, Robert J Greensted, Eunice Tan, and Mark D Nicholson
• R ecent amendments to IFRS 17 eliminated significant accounting mismatches for primary insurers that would
have created risks for reinsurers.
• Despite this improvement, we believe the transition to IFRS 17, including the adoption of new metrics, is a
major challenge for reinsurers and users of their financial reporting.
• We expect pending updates to GAAP to somewhat improve the comparability between those standards and
IFRS 17, but differences will remain.
• The new metrics could affect reinsurers’ risk appetite and bring about shifts in business and financial
strategies that could, in the long term, have a ratings impact.
8 Global Reinsurance Highlights | 2020
Soundbites
APAC
Eunice Tan, Koshiro Emura, Craig A Bennett, WenWen Chen, and Charles-Marie Delpuech
• R einsurance protection is becoming essential, and more costly, for insurers as extreme weather events rise.
• Costlier protection in markets such as Japan and Australia will eat into the underwriting margins of direct
insurers, prompting a relook at catastrophe appetites.
• China’s wide gap between economic and insurance losses shows the need to raise catastrophe reinsurance
awareness and demand.
• Catastrophe models are growing in importance as Asia-Pacific insurers enhance oversight of weather-induced
losses amid global warming concerns.
Investments
Marc-Philippe Juilliard, Johannes Bender, Ali Karakuyu, Dennis P Sugrue, and Charles-Marie
Delpuech
• T
he stress test S&P Global Ratings performed to see how reinsurers’ capital adequacy has been affected by
the economic impact of the COVID-19 pandemic shows most of the top 20 global reinsurers would retain a
smaller, but positive buffer.
• Reinsurers’ underwriting activity is, by definition, more volatile, representing about two-thirds of their capital
needs, compared with an average of less than half for primary insurers.
• Although reinsurers’ appetite for asset risk is therefore smaller than that of primary insurers, persistent low
interest rates prompted a shift to riskier and more illiquid assets over the past decade.
North American Investment Stress Test
Taoufik Gharib, Hardeep S Manku, and Saurabh B Khasnis
• C OVID-19 has brought the global economy to a screeching halt, spurring unprecedented financial market
volatility and policy responses.
• S&P Global Ratings’ investment stress tests have shown that almost all of its rated North American reinsurers
are able to maintain capital adequacy in line with the ratings for now.
• North American reinsurers are carrying thinner capital buffers than in the past. Therefore, those with riskier
investment strategies and outsize natural catastrophe exposure are at risk if market losses intensify and 2020
ends up being an above-average catastrophe year.
• We will likely take negative rating actions if COVID-19 becomes a capital event and reinsurers aren’t able to
rebuild their capitalization over the next 12 to 24 months.
Cat Bonds
Maren Josefs, Ali Karakuyu, and Johannes Bender
• F
inancial markets have recently proved to be highly correlated, as the COVID-19 pandemic cut a swath
through various different industries. However, catastrophe bonds usually protect against specific perils across
different regions and cover predominantly residential risks, with limited exposure to commercial business.
Hence, S&P Global Ratings does not expect investors in cat bonds to suffer significant losses as a result of
COVID-19 and hence future new issuance to continue.
Global Reinsurance Highlights | 2020 9
Reinsurance Outlook
Black Swan Or Not,
COVID-19 Is Disrupting Global
Reinsurers’ Profitability
By Taoufik Gharib, Johannes Bender, Hardeep S Manku, and Ali Karakuyu
When analyzing the global reinsurance sector, S&P Global Ratings reviews operating performance
on a multiyear basis rather than a single year’s results because of the nature of the business,
which can result in elevated losses for any given year. The industry struggled to earn its cost of
capital (COC) in 2017 and 2018, and barely did so in 2019. Reinsurance pricing reacted in 2019
leading up to the January 2020 renewals, but price increases were mostly in the U.S. and Japan,
confirming the regionalization of pricing trends.
Shutterstock / Ellerslie
10 Global Reinsurance Highlights | 2020Reinsurance Outlook
Chart 1: Top 40 global reinsurers rating distribution*
E
ntering 2020, the expectations Chart 1: Top 40 global reinsurers rating distribution*
16
were that this year the reinsurance 16
caravan was set on the right route
and reinsurers would improve their
results. However, COVID-19 losses and
the ensuing market volatility became the
8
straw that broke the camel’s back. 8
Once again, the sector will not earn 6 6
6 6
its COC this year, bearing in mind it has
3
struggled in the past three years to do 3
so due to large natural catastrophe 1
1
losses, adverse loss trends in certain U.S.
casualty lines, and fierce competition AA+ AA AA- A+ A A-
among reinsurers exacerbated by AA+ AA AA- A+ A A-
*Financial strength ratings on core operating subsidiaries as of Aug. 31, 2020.
alternative capital. Therefore, on May 18, *Financial strength
Source: S&P Global ratings
Ratings.on core operating subsidiaries as of Aug. 31, 2020.
2020, we revised our outlook on the global Source: S&P
Copyright © Global
2020 byRatings.
Standard & Poor's Financial Services LLC. All rights reserved.
reinsurance sector to negative from Copyright © 2020 by Standard & Poor's Financial Services LLC. All rights reserved.
stable, as we believe business conditions
are difficult.
Our negative outlook is an overall Chart 2: Top 40 global reinsurers outlook distribution*
indicator of credit trends over the next 12 Chart 2: Top 40 global reinsurers outlook distribution*
months including distribution of outlooks
Positive (0%)
on ratings, existing sector-wide risks, and Positive (0%)
emerging risks. Therefore, our negative Negative (17%)
outlook indicates that we expect to take Negative (17%)
additional negative rating actions on
reinsurers over the next 12 months. As
of August 31, 2020, 17% of ratings on the
top 40 reinsurers carry a negative outlook
(Charts 1 and 2).
In his 2007 book, “The Black Swan”,
Nassim Nicholas Taleb coined the term
“a black swan event” for an unpredictable
catastrophic event . Whether the
Stable (83%)
pandemic is a black swan event or not, Stable (83%)
in the first six months of 2020, the top
20 global reinsurers reported COVID-
19 losses of about $12 billion, which
*As of Aug. 31, 2020. Source: S&P Global Ratings.
are an earnings event for the industry *As of Aug. 31, 2020. Source: S&P Global Ratings.
Copyright © 2020 by Standard & Poor’s Financial Services LLC. All rights reserved.
on a stand-alone basis. Combined with Copyright © 2020 by Standard & Poor’s Financial Services LLC. All rights reserved.
other insurance losses, notably natural
catastrophes and capital market volatility
including investment losses, the sector global reinsurers’ capital adequacy A l t e r n a t i v e c a p i t a l c a p a c i t y,
could swing to a loss for the year. Thus, stillChart
redundant3: Deaths at the from ‘AA’pandemics,
confidencefrom antiquitycollateralized
especially to the modernreinsurance, era
Chart 3: Deaths from pandemics, from antiquity to the modern era
the sum of these losses could become a level at year-end 2019. This cohort of ON RIGHT will remain constrained in the near
DETAIL
DETAIL
capital event for the sector in 2020. companies
0 200 400 raised
600 800 close
1000 to $10
1200 1400 billion
1600 1800 in1900 term
ON RIGHT
2020 as’10alternative
1900 ’20 ’30 ’40 ’50 ’ 60 ’70 ’80 capital
’90 ’00 ’10 2020providers
0 200 400 600 800 1000 1200 1400 1600 1800 1900 2020 1900 ’10 ’20 ’30 ’40 ’50 ’ 60 ’70 ’80 ’90 ’00 ’10 2020
We have revised our 2020 P/C capital this year, some New of it to prefund are reeling
World Spanish from Flu their capital being
Antonine Plague Smallpox Third Plague Swine Flu
New
combined ratio expectation for the top upcoming165-180maturities,
Antonine A.D.
Plague andWorld the restThird
1520-unknown
Smallpox is Plague
1885 trapped Spanishfor four
1918-1920 Flu years Swine in aFlurow and
2009-unknown
25-55 million 12 million 50 million
1918-1920 200,000
20 global reinsurers to 103%–108%, 165-180
incremental capital. 1520-unknown
5 millionA.D.
25-55 million
1885
12 million
its underperformance
50 million
2009-unknown
over
200,000
the past
5 million
including a natural catastrophe load of Most reinsurers halted their share few years.
ItalianPlague Furthermore,
Asian Flu
the
Ebola
concerns
8–10 percentage points (pps), reserve buybacks to bolster their balance ItalianPlague
1629-1631
sheets regardingAsian any
1957-1958 Flupotential Ebola leakage from
2014-2016
Black Death 1 million
1629-1631 1 million 11,000
2014-2016
1957-1958
releases of 2–3 pps, and COVID-19 impact once COVID-19 became
1347-1352
Black Death a real 1threat. million In business1 million interruption 11,000 into property
of 6–8 pps, as well as an ROE of 0%–3%. addition, there 75-200
is a million
1347-1352 formation of a Russian coupleFlu coverage,Hong in Kong addition to potential
75-200 million 1889-1890
Russian Flu Flu MERS
The reinsurance sector remains of startups that would like to capitalize 1 million
1889-1890 opportunities Hong
1968-1970 in other
Kong Flu asset 2015classes will
MERS
1 million 1 million
1968-1970 Less than 1,000
2015
well capitalized, with the top 20 on the hardening reinsurance pricing. likely affect capital providers’
1 million appetites.
Less than 1,000
Plague of Great Plague
Justinian
Plague of of London
Great Plague Yellow Fever SARS COVID-19
541-542 A.D.
Justinian 1665
of London Late 1800s
Yellow Fever SARS
2002-2003 COVID-19
2020
30-50 million
541-542 A.D. 75,000-100,000
1665 150,000
Late 1800s Global Reinsurance
Less than 1,000 Highlights
2002-2003 2020 | 2020
(as of Aug. 31) 11
30-50 million 75,000-100,000 150,000 Less than 1,000 849,389
(as of Aug. 31)
849,389Stable (83%)
Reinsurance Outlook
*As of Aug. 31, 2020. Source: S&P Global Ratings.
Copyright © 2020 by Standard & Poor’s Financial Services LLC. All rights reserved.
Overall reinsurance pricing has been Chart 3: Deaths from pandemics, from antiquity to the modern era
hardening during the past 18 months, DETAIL
ON RIGHT
with tightening terms and conditions, 0 200 400 600 800 1000 1200 1400 1600 1800 1900 2020 1900 ’10 ’20 ’30 ’40 ’50 ’ 60 ’70 ’80 ’90 ’00 ’10 2020
further supported by COVID-19 losses. New World Spanish Flu Swine Flu
Antonine Plague Smallpox Third Plague
Reinsurers were already dealing with 165-180 A.D. 1520-unknown 1885 1918-1920 2009-unknown
50 million
adverse loss trends in U.S. casualty and 5 million 25-55 million 12 million 200,000
certain specialty lines, which might be ItalianPlague Asian Flu Ebola
exacerbated by the pandemic-induced 1629-1631 1957-1958 2014-2016
Black Death 1 million 11,000
stresses and the increasing frequency 1 million
1347-1352
and severity trends owing to social 75-200 million Russian Flu
1889-1890 Hong Kong Flu MERS
inflation. 1 million 1968-1970 2015
1 million Less than 1,000
COC has increased and retrocession
Plague of Great Plague
capacity is expensive. Investment income Justinian of London Yellow Fever SARS COVID-19
541-542 A.D. 1665 Late 1800s 2002-2003 2020
is bound to suffer over the next couple of 30-50 million 75,000-100,000 150,000 (as of Aug. 31)
Less than 1,000
years as portfolios face lower-for-longer 849,389
interest rates, higher credit losses, and
Sources: The Washington Post. Johns Hopkins University.
increased credit migration. Therefore,
Copyright 2020 by Standard & Poor’s Financial Services LLC. All rights reserved.
higher technical underwriting margins
are needed to make up for the shortfall
in investment income and for insured epidemics as recently as in the past on policy language. Most standard
losses, which we believe will carry the two decades: Ebola (2014–2016), MERS business interruption and aviation
positive pricing momentum into 2021. (2015), Swine4:flu
Chart (2009),adequacy
Capital and SARS (2002–of the toppolicies
20 global only cover losses from physical
reinsurers
We recognize the high degree of 2003).by Soconfidence level aren’t rare.
clearly, pandemics damage events—excluding infectious
uncertainty regarding the rate of spread The world has become a global diseases. For70% example,
68% U.S. policies for
and peak of the coronavirus outbreak, village aided by low-cost international the most part exclude communicable 2014
51%
and the potential for a second wave in the air travel, which has exacerbated the diseases. For business interruption
44% 47%
in the
2015
43%
fall. There is also uncertainty around the exponential spread of the virus. This time,35% U.S., there could be legislative attempts
2016
33%
shape of the recovery, how the economy the economic impact 25% may have been to retroactively expand insurance 2017
23% 21%
and consumers will react to various more dramatic
14% because of the 14%
increased contract 15% 18% coverage. We believe that 2018such
11% 14%
stimuli, and whether we will revisit interconnectivity and interdependence 6% 5% 8% efforts would be unsuccessful,2019 unless
market lows and volatility that we saw of our global2%systems as well as the the government provides resources to
in March of this year. Furthermore, the unexpected
(0.1) and rushed
-5%
-6%
-4% lockdowns. insurers to meet these obligations.
risk of legal, regulatory, and legislative In the firstAAAhalf of 2020, AAthe S&P AOutside of the U.S.,
BBBthere is an element
intervention that redefines coverage Global Ratings’ cohort of the top 20 of uncertainty about whether business
terms remains an overhang on the sector global Source: S&P Global
reinsurers Ratings’ risk-based
recognized about $12insurance capital adequacy
interruption model. will be triggered
claims
Copyright © 2020 by Standard & Poor’s Financial Services LLC. All rights reserved.
in the short term. billion in COVID-19 losses or about 6 and covered by re/insurers and may be
pps on the combined ratio based on subject to legal proceedings, particularly
Reinsurers Are Debating Whether annualized earned premiums. These for policies with less definitive wordings
The Pandemic Is A Black Or A White booked figures are mostly incurred but around pandemic coverage. We therefore
Swan not reported losses representing first- do not rule out that either regulatory or
According to Johns Hopkins University, Chart 5:from
order impacts 2019thetopoutbreak,
20 global and reinsurers
legalcapital
pressure stress
to paytest
claims may arise,
total global COVID-19 cases reached 25.4 include event 90 cancellation, (contingent) with the potential for further volatility for
million at the end of August 2020, with business interruption,
80 aviation, directors reinsurers. Furthermore, we expect loss
71.5
about 850,000 deaths in 188 countries and officers, 70 errors and omissions, credit adjustment expenses (LAE) to increase
62.6
and regions. Given the rapid propagation including surety60 and mortgage, mortality, with a rise in litigation.
50
(Bil. $)
of COVID-19 globally, some industry travel, and workers’ compensation.
46.4 We
40 37.5indirect
experts rushed to label the pandemic believe additional direct and 33.7 32.5 Reinsurance Renewals Indicate
as a black swan event. However, Taleb COVID-19-related30 losses could emerge 20.6 A Firming Market, But Not
20.3 18.0 17.2
20 Necessarily A Hard One Yet
argues that COVID-19 isn’t a black swan over the coming quarters. 12.2 10.3
10 6.2 3.1
but reveals the fragility of our systems. A potential rise in corporate defaults The sentiment for rate increases 2.4had
0
In contrast, the September 11, 2001, will hit directors and officers policies, been in place for the past 18 months or
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pandemics throughout millennia (Chart For business interruption and aviation, lagged those in the primary insurance
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12 Global Reinsurance Highlights | 2020
Impact on the top 20 BBB excess capital A excess capital AA excess capital
reinsurers’ capitalizationAA+ AA AA- A+ A A-
*Financial strength ratings on core operating subsidiaries as of Aug. 31, 2020.
Source: S&P Global Ratings.
Copyright © 2020 by Standard & Poor's Financial Services LLC. All rights reserved.
Reinsurance Outlook
Chart 2: Top 40 global reinsurers outlook distribution*
Positive (0%)
reinsurers expected pricing to rebound Negative (17%) the loss experience and cedents’ ability
coming into 2020, with a major pick-up “Pandemic-related to manage LAE. Terms and conditions
seen during midyear renewals, which considerations didn’t really also improved, with pandemic and cyber
were promising although somewhat exclusions put in and LAE caps included
start to fully factor in until
below what the sector had hoped to reflect the adverse developments
for. Despite the risks from COVID-19 June renewals, which gave on hurricanes Irma and Michael losses
becoming prominent, pandemic-related a further boost to pricing.” due to assignment of benefits issues.
considerations didn’t really start to fully Despite the magnitude of rate increases,
factor in until June renewals, which gave the reinsurance sector’s net exposure
a further boost to pricing. to Florida is relatively down from the
During the Stable (83%) renewals, global
January previous year.
reinsurance pricing saw an aggregate Finally, the July renewals saw similar
increase in the low-to-mid single digits tempered price gains. While most of the upward pricing trends depending on
but it was not an across-the-board reinsurers retained their participation, the region, cedent, and line of business.
increase,
*As of with
Aug. 31, pricing dynamics
2020. Source: varying
S&P Global Ratings. the market shares shifted slightly to the However, outside the U.S., rate increases
by region,
Copyrightline of business,
© 2020 by Standard and cedents’
& Poor’s Financiallarge
ServicesEuropean
LLC. All rightsreinsurers, reserved. as they upped were relatively subdued but positive,
performance. While property and their participation while a few North a change from historical trends. In a
property-catastrophe price increases American reinsurers pulled back. nutshell, overall reinsurance pricing has
were satisfactory at best, a more Florida June renewals experienced been hardening with tightening terms
promising
Chartaspect
3: Deaths of thefromrenewals was thefrom
pandemics, d i santiquity
l o c a t i o nto . the T h emodern re n e wera a l s w e re and conditions, further supported by
revival in U.S. casualty pricing, albeit still DETAIL completed, but it wasn’t smooth sailing. the outbreak losses, which will carry the
insufficient, which in the past had been ON RIGHT Limits were taken out of the market, for momentum into 2021.
0 200 400 600 800 1000 1200 1400 1600 1800 1900 2020 1900 ’10 ’20 ’30 ’40 ’50 ’ 60 ’70 ’80 ’90 ’00 ’10 2020
characterized by subsidization from U.S. instance, the non-renewal of the Florida
New World
property-catastrophe
Antonine Plague business.
Smallpox Hurricane Spanish
Third Plague Catastrophe Flu
Fund limit
Swine Fluof $920 Capitalization Remains A Strength
165-180 A.D. 1520-unknown 1885 1918-1920 2009-unknown
April renewals are 25-55
5 million primarily
million Asia- million and $560 million limit
12 million 50 million 200,000 reduction The reinsurance sector benefits from
Pacific centric with Japan being the by Citizens, Florida insurer of last resort. robust capital adequacy, which remains
ItalianPlague
largest market. Due to large losses from But, even Asian
1629-1631
withFlu the reducedEbola demand, the a pillar of strength for most reinsurers.
1957-1958 2014-2016
typhoons Jebi, BlackHagibis,
Death and Faxai, and 1 million rates were1 million significantly higher. 11,000 Unlike in This strength softens the potential
1347-1352
related adverse 75-200reserve
million developments, Russian Flu
previous years when alternative capital blow from the severity risks that the
Hong Kong Flu MERS
reinsurers had been reaching out to led on pricing,
1889-1890 this year traditional industry is exposed to. For example,
1 million 1968-1970 2015
their cedents much in advance of the reinsurers drove pricing forLess 1 million a change.
than 1,000 natural catastrophes, long-tail casualty
renewals. In the end, pricing for wind and
Plague of Great Plague Traditional reinsurers dealing with reserves, and pandemics, to name a few,
Justinian of London Yellow Fever SARS COVID-19
flood exposures
541-542 A.D. rose by 1665up to 50% on higher losses,
Late 1800s 2002-2003 constrained 2020 alternative are risks that reinsurers assume in their
30-50 million 75,000-100,000 150,000 Less than 1,000 (as of Aug. 31)
loss-affected business but it left some capital capacity, and higher retrocession
849,389 underwriting operations.
reinsurers hoping to get to a quicker costs, pushed hard for higher rates as the The reinsurance industry often serves
Sources:
payback The Washington
somewhat Post. Johns Hopkins University.
disappointed. pandemic added another concern to the as a backstop for the primary insurance
This market is largely& served
Copyright 2020 by Standard Poor’s Financial
by Services
list. The LLC.
rateAll rights
increases reserved. averaged 25%– market. Therefore, to cope with these
traditional capital and there wasn’t much 35% but the range was much broader severity risks and the ensuing volatility,
of a capital constraint, which may have (in some cases up to 80%) depending on global reinsurers tend to be strongly
capitalized with generally conservative
investment strategies (Chart 4).
Chart 4: Capital adequacy of the top 20 global reinsurers
by confidence level The top 20 global reinsurers’
70% capitalization strengthened in 2019 and
68%
2014
was 8% redundant at the ‘AA’ confidence
51%
2015
level relative to 5% in 2018, because of
44% 47%
43% a strong capital market recovery. This
35% 2016
33% cohort lost their capital redundancy at
25% 2017
23% 21% the ‘AAA’ confidence level in the past three
14% 14% 15% 18% 2018
14%
11%
6% 5% 8%
years because of record catastrophe
2019
2% losses in 2017 and 2018, adjustments to
-5% -4%
the large global reinsurers’ asset liability
(0.1) -6%
management and longevity risk capital
AAA AA A BBB
charges, share buybacks, and special
Source: S&P Global Ratings’ risk-based insurance capital adequacy model. dividends.
Copyright © 2020 by Standard & Poor’s Financial Services LLC. All rights reserved. Given the extreme turbulence in the
Global Reinsurance Highlights | 2020 1314% 14% 15% 18% 2018
11% 14%
6% 5% 8% 2019
2%
(0.1) -5% -4%
-6%
Reinsurance Outlook AAA AA A BBB
Source: S&P Global Ratings’ risk-based insurance capital adequacy model.
Copyright © 2020 by Standard & Poor’s Financial Services LLC. All rights reserved.
capital markets earlier this year and the Chart 5: 2019 top 20 global reinsurers capital stress test
uncertainty around COVID-19 losses,
90
reinsurers have halted their share 80
71.5
repurchases, a few have curtailed their 70 62.6
dividends due to regulatory guidance, 60
and many have raised capital that 50
(Bil. $)
46.4
totaled close to $10 billion year-to-date, 40 37.5
33.7 32.5
to bolster their balance sheets, with 30
20.6 20.3 18.0 17.2
some aiming to take advantage of more 20
12.2 10.3
10 6.2 3.1
favorable reinsurance pricing. 2.4
0
This capital took the form of debt,
0)
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hybrids, and even common equity, which
lo
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should cushion against what seems to
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be an active catastrophe year. We believe
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the sector in the next two years, but could
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be tested again by market volatility (Chart
CO
A excess capital AA excess capital
5). Impact on the top 20 BBB excess capital
reinsurers’ capitalization
As rate increases are booked, and
earned, through income statements Source: S&P Global Ratings. RoC--Return on capital. CoC--Cost of capital.
over the upcoming quarters, this should Copyright © 2020 by Standard & Poor’s Financial Services LLC. All rights reserved.
improve the accident-year loss ratios.
However, because of the confluence of Cost Of Capital And 2020 Doesn‘t Look 2019 helped the sector barely earn its
COVID-19 losses, adverse loss trends Promising COC. This meant that the gap between
notably in U.S. casualty lines, and The globalChart 6: Reinsurers
reinsurance weighted-average
sector’s track record the sector’s cost of capital
actual ROC and COC was a
natural catastrophe claims, we forecast of earningversus
its COCreturn
has been on capital
weak. Similar positive 0.9%. In the first half of 2020, the
an underwriting loss for the industry in to 2017
18and 2018, 2020
16.6 will be another year sector took a hit from COVID-19-related
15.9
2020 with a combined ratio of 103%– when 16reinsurers will struggle 14.3
to meet their losses, significantly lower net investment
108% for the top 20 reinsurers and an In 2017 and 2018, the reinsurance income relative to the previous year,
COC. 14
11.6
extremely low ROE of 0%–3% (Table sector12generated an ROC of only 11.0 1.5% overall
10.5 10.4 capital market volatility with
9.9
1). Although we expect some COVID- and 2.9% 9.2 COC, declining8.8equity valuations, and spread
10 below its
8.77.2%
9.0 and 7.8%
8.4
(%)
7.9 7.7 7.4 7.8 8.1 7.8 7.6 7.2
19 losses will emerge next year, the respectively (defined as the weighted- widening.
7.1 6.7 7.2
8 6.6 6.9
earnings picture will likely improve in average 6 cost4.5of capital). The impact of 2017 However, the capital markets’
5.8 6.0 3.2
2021 as reinsurance rate increases 4 natural catastrophe losses, loss surprising quick recovery 2.9 after the
and 2018 2.4 2.1first
4.4 4.7 4.0 2.9
are earned, and assuming COVID-19 creep, 2and investment market 3.8 volatility
3.3 quarter through the 2.7
in 3.0 end of August has
0.7
2.2 1.9 1.8 2.2 2.3 2.4 1.5 0.7
losses are contained within the current fourth-quarter
0 2018, all played a significant provided some—perhaps1.9temporary—
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Q1 Q2
aggregate estimates. part in these results. relief to reinsurers. But, credit2020 risk2020
within
The Industry Has Struggled To Earn Its Return on capital
The improved investment returns in fixed-income portfolios remains elevated,
Weighted-average 10-year U.S.
cost of capital treasuries
Source:
Table 1: Top 20 global reinsurers combined ratio and ROE S&P Global Ratings, Bloomberg.
performance
Copyright © 2020 by Standard & Poor’s Financial Services LLC. All rights reserved.
(%) 2015 2016 2017 2018 2019 2020F 2021F
Combined ratio 90.7 95.1 109.0 101.0 101.0 103-108 97-101
(Favorable)/unfavorable reserve (6.5) (6.0) (4.6) (4.7) (1.0) (2)-(3) (2)-(3)
developments
Natural catastrophe losses impact on 2.8 5.7 17.1 9.3 7.2 8-10 8-10
the combined ratio Chart 7: Global reinsurance capital by source
Accident-year combined ratio excluding 94.5 95.4 96.6 96.3 94.8 605 92.0 625 91.0
575 595 585 590
natural catastrophe losses, COVID-19 540
565
losses, and reserve developments 505
470 455
COVID-19 losses impact on the N.A.
385
410 N.A 400 N.A. N.A. N.A. 6-8 1-2
combined ratio 340
530 499
3.0 511 4939.2514 516 488
(Bil. $)
Return on equity 10.2 8.3 1.6 0-3 5-8
461 490
F: Forecast. N.A.: Not applicable. The top 20 global reinsurers388
are: Alleghany, 447 428
368 378 Arch, Aspen, AXIS, China Re, Everest Re, Fairfax, Fidelis,
321
Hannover Re, Hiscox, Lancashire, Lloyd’s, Markel, Munich Re, PartnerRe, Qatar Ins, RenaissanceRe, SCOR, Sirius, and Swiss Re.
44 50 64 72 81 89 97 95 91
17 22 19 22 24 28
14 Global Reinsurance Highlights | 2020
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Q1
2020
Traditional capital Alternative capital Global reinsurer capitalsu
o
t
ar
ar
ar
50
30
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a
(fi
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0
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0
50
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1/
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nd
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Reinsurance Outlook
CO
Impact on the top 20 BBB excess capital A excess capital AA excess capital
reinsurers’ capitalization
Source: S&P Global Ratings. RoC--Return on capital. CoC--Cost of capital.
Copyright © 2020 by Standard & Poor’s Financial Services LLC. All rights reserved.
which will test the sector’s investment Chart 6: Reinsurers weighted-average cost of capital
returns in 2020–2021. versus return on capital
Insurance losses, including COVID-19- 18 16.6
15.9
related claims, coupled with investment 16 14.3
and natural catastrophe losses, reduced 14
11.0 11.6
the sector’s ROC in the first half of 2020 12 9.9
10.5 10.4
9.0 9.2
to 2.1% compared with 6.9% in 2019. At 10 8.7 8.4 8.8
(%)
7.9 7.7 7.8 8.1 7.8 7.6
7.4 7.1 7.2 7.2
the same time, the COC rose to 7.2% from 8 6.7
6.6 6.9
6.0%, because of higher equity and credit 6 4.5 5.8 6.0
4 2.9 3.2
risk premiums, partially mitigated by 4.7 2.9 2.4 2.1
4.4 4.0
2 3.8 3.3
declining risk-free rates (Chart 6). 3.0
2.4 1.5 2.7 0.7
2.2 1.9 1.8 2.2 2.3 1.9 0.7
In addition, any constraints on 0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Q1 Q2
alternative capital, which the sector has 2020 2020
come to rely on heavily, will also push up the Weighted-average Return on capital 10-year U.S.
cost of capital treasuries
cost of doing business. While it’s difficult to
project the sector’s full-year 2020 earnings Source: S&P Global Ratings, Bloomberg.
Copyright © 2020 by Standard & Poor’s Financial Services LLC. All rights reserved.
because of rising uncertainties, it’s unlikely
that they will be sufficient to meet the
sector’s COC. For some reinsurers, which quarter 2020, from year-end 2019, and such as wildfires, risk selection/
we would consider negative outliers, the represented about 15.4% of the $590 underwriting, loss reporting, and reserve
2020 underperformance may become a billion global reinsurance capital. Based setting, and the potential climate change
capital event. on discussions with major reinsurers, we impact on the increase in frequency and
Prospectively, we could reconsider believe Chart
the $917: Global
billion reinsurance
of assets under capital by source
severity of natural catastrophes.
625
our negative outlook on the sector at the management included about $20 billion This has
575 565 595
caused605 a flight
585 to quality,
590 as
point that we believe that the sector may of trapped capital as collateral. Investors 540
investors have become more selective
505
470 455
earn its COC, which we don’t expect will are still reeling from their capital being and have shifted their attention to well-
410 400
happen before 2021, at the earliest. 385
locked for the fourth year in a row because established sponsors or managers
340
of the 2019–2020 natural catastrophe with a better514 track 516record,
488 530modelling
499
(Bil. $)
511 493
Alternative Capital Backers Are losses, adverse developments on 2017– 461 490
capabilities, clearer underwriting
447 428
More Selective, While Capacity 368 388
2018 events, and321potential
378 for leakage strategies, and stronger reserving
Remains Constrained from business interruption into property practices and governance while asking
In 2019, alternative capital in the coverage due to COVID-19. 44 for higher
50 64 returns.
72 81 89 97 95 91
17 22 19 22 24 28
reinsurance market decreased for the The 2006
decrease in alternative capital During the past 18 months,
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Q1
it
first time since the 2008 financial crisis, was caused by dismal returns in the seemed that alternative capital 2020ran
and the trend has continued in 2020. past few years,Traditional capital
loss payments, and Alternative
loss out capital
of steam, but Global
thereinsurer capital
case for investing
However, alternative capital, which creep from earlier
Sources: events, exacerbated
Aon Securities Inc. in low-correlated insurance-linked
includes collateralized reinsurance by governance
Copyright issues
© 2020 byatStandard
certain&funds. assets
Poor’s Financial to diversify
Services in a reserved.
LLC. All rights low interest rate
funds, insurance-linked securities, These factors, among other things, have environment remains valid. As a result,
sidecars, and industry loss warranties, triggered redemptions by some investors we believe alternative capital backed by
still plays an important role in the global while others paused to reassess their long-term investors remains committed
reinsurance market despite its recent appetite for insurance risk. Investors also to property-catastrophe risk and is here
decline. have concerns vis-à-vis model credibility, to stay, further supported by hardening
In general , alternative capital includingChart
models8: Top
for global
secondarylife reinsurers average return
perils reinsurance on equity
pricing. However, this
accounts for about 20% of total property- hypothesis could be tested if additional
16
catastrophe reinsurance capacity, but collateral is trapped while other asset
it provides more than 75% aggregate
“Prospectively, we could classes may offer higher returns.
14
retrocession capacity. Therefore, it reconsider our negative 13.6
Alternative capital has expanded to
continues to exert its influence on outlook
12 on the sector at other lines of business such as in-force
11.2
reinsurance and retrocession pricing. the point that we10.3 believe life and annuity blocks, and has become
10.2
We believe the pullback is temporary in 10 a vital risk transfer instrument for U.S.
that the sector may earn
a prolonged period of more inflow and 8.9
private mortgage insurers. Year-to-date
its COC,
8 which we don’t
influence from nontraditional third-party catastrophe bonds issuance has been
expect will happen before
(%)
capital sources. 6
healthy and we expect it will remain 6.0 so
According to Aon, alternative capital 2021, at the earliest.” during the remainder of 2020 and into
fell 4.2% to $91 billion at the end of first- 4 2021, aided by the dislocation in 4.0 the
2 Global Reinsurance Highlights | 2020 15
02 3.3 3.0 2020
0.7 2020
2.2 2.2 2.3 1.5 2.4 2.7
Weighted-average 1.9 Return
1.8 on capital 10-year U.S.1.9 0.7
0
cost of capital treasuries
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Q1 Q2
2020 2020
Source: S&P Global Ratings, Bloomberg.
Weighted-average Return on capital 10-year U.S.
cost©
of2020
capital
Reinsurance Outlook Copyright by Standard & Poor’s Financial Services LLC.treasuries
All rights reserved.
Source: S&P Global Ratings, Bloomberg.
Copyright © 2020 by Standard & Poor’s Financial Services LLC. All rights reserved.
Chart 7: Global reinsurance capital by source
605 585 625 590
575 565 595
retrocession market. We believe that once Chart 7: Global reinsurance 505
capital by source
540
the dust settles and the losses are fully 470 455
605 585 625 590
410 400 575 565 595
digested with greater visibility around 385 540
340 505
COVID-19 losses, alternative capital will 470 455 516 488 530 499
511 493 514
(Bil. $) (Bil. $)
likely renew with growth (Chart 7). 410
385 400 461 490
340 447 428
368 388 321 378
516 488 530 499
Life Reinsurers Are Facing Higher 511 493 514
461 490
Mortality Losses, But The Impact Is 447 428
368 388 378 44 50 64 72 81 89 97 95 91
17 22 19
321 22 24 28
Manageable
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Q1
The life reinsurance sector has not 97 95
2020
44 50 64 72 81 89 91
17 22 19 capital
22 24 28 Alternative Global reinsurer capital
remained unscathed by the pandemic, Traditional capital
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Q1
with the top 20 global reinsurers Sources: Aon Securities Inc. 2020
reporting about $1 billion of COVID-19- Copyright © 2020capital
Traditional by Standard & Poor’s Financial
Alternative Services LLC. Global
capital reinsurer
All rights capital
reserved.
related underwriting losses in the first Sources: Aon Securities Inc.
half of the year. Underwriting losses arise Copyright © 2020 by Standard & Poor’s Financial Services LLC. All rights reserved.
mainly from a higher mortality rate due
to the outbreak, with the majority of the
losses from the U.S.
However, the ultimate losses will Chart 8: Top global life reinsurers average return on equity
depend on the actions of governments
16
and society at large to control the spread, Chart 8: Top global life reinsurers average return on equity
which will influence the mortality,
14
16 13.6
longevity, and morbidity experience. This
also highlights the sector’s sensitivity 12
14 11.2
to key actuarial assumptions related 13.6
10.3 10.2
to these business lines including 10
12
correlation. 11.2 8.9
8 10.3 10.2
However, compared with the P/C 10
(%)
reinsurance sector, life reinsurance is less 8.9
6 6.0
affected, we believe. Despite the negative 8
(%)
impact from COVID-19, we believe the life 4 4.0
6 6.0
reinsurance sector continues to benefit
from strong credit fundamentals and 2
4 4.0
helps with diversification benefits for
multiline reinsurers. While the operating 0
2
2015 2016 2017 2018 2019 2020F
performance will weaken in 2020, we still
expect an ROE of 4%–6% in 2020 relative 0 F: Forecast. Source: S&P Global Ratings’ estimated figures based on life
reinsurance books of the following reinsurers: China Re, Hannover Re, Munich Re,
to 10.2% in 2019. With the expected 2015 2016 2017
Reinsurance Group of America, SCOR, and Swiss Re.
2018 2019 2020F
economic recovery in 2021, the ROE will F: Forecast. Source: S&P Global Ratings’ estimated figures based on life
Copyright © 2020
reinsurance booksby
ofStandard & Poor's
the following Financial
reinsurers: Services
China LLC. All rights
Re, Hannover reserved.
Re, Munich Re,
likely improve to about 10% (Chart 8).
Reinsurance Group of America, SCOR, and Swiss Re.
In general, with its high barriers
to entry and fewer global players, life rates Copyright © 2020 by Standard & Poor's Financial Services LLC. All rights reserved.
from primary insurers. The Foggy Conditions Ahead
reinsurance is less price sensitive U.K. longevity business continues There is no playbook for the conditions
relative to P/C. Reinsurance buyers are to see strong demand. However, we reinsurers find themselves in. Although
sophisticated, precluding the need for believe the industry’s future growth the reinsurance sector is adept in
intermediaries, and demand is less will mostly come from Asian markets, dealing with multiple large catastrophic
driven by available capacity and more specifically emerging markets, which events, the current state of affairs is
by balance-sheet management. We have are experiencing increased insurance producing additional stresses and
also observed an increasing demand for penetration supporting robust growth uncertainties. Unfortunately, reinsurers
financially motivated reinsurance for of primary life business. Mergers and are facing the pandemic at a time when
capital relief amid the hike in reserve acquisitions and alternative capital the tide was turning on the soft pricing
provisions caused by low interest rates. aren’t transformative in this space. cycle. In dealing with COVID-19 losses,
The U.S. is the sector ’s biggest Therefore, we think the competitive the resultant stresses may expose
market, with 40% market share of landscape will remain largely stable over weaknesses of the past in a more severe
global premiums with stable cession the next few years. way, dealing a blow to some reinsurers.
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