A reinsurance market review prepared by the London-based Benfield Group, one of the world’s leading independent reinsurance intermediaries, has concluded that “despite the massive tidal wave of new capital which has flooded into the reinsurance markets, it’s too little too late.”
“The key issues for the reinsurance industry can be summarized by three Cs: capital, capital and capital,” says the report entitled The Big Squeeze. “The influx of new capital after WTC appears increasingly inadequate against the massive outflow caused by falling investment markets, reserve strengthening, and escalating catastrophe losses.” The report noted that since 2000, the industry has lost some $200 billion of capital against the $26 billion raised in 2001 and $19 billion in 2002.
It pointed out that “reinsurer balance sheets are being squeezed from all sides. Interest rates remain exceptionally low. Cedants and rating agencies are increasingly focused on capital adequacy. Shareholders, for their part, are demanding improved returns.” Benfield concluded that in order to generate those returns in the current investment climate, “reinsurers will have to achieve combined ratios far below historic levels. However, rates are already showing signs of weakening in many market sectors.”
The report predicted that the reinsurance industry would face the following problems in 2003:
— Many reinsurers will have to continue addressing significant reserving shortfalls, particularly for asbestos.
— Equity market weakness will continue to negatively affect balance sheets and constrain the ability of reinsurers to raise additional capital.
— Reinsurance recoverables, underwriting exposures to credit risk and the deteriorating corporate default climate, will pose increasing problems for reinsurers.
Despite the radical changes in market conditions, the report notes that two aspects of the reinsurance market remain the same: “First, the pricing cycle is alive and well and is already beginning to assert itself. Secondly, imperfect distribution of capital across the industry means that availability of capacity varies widely across the market. However, expectations of a prolonged hard market are already looking unrealistic.”
Copies of the report are available on the group’s Website at: www.benefieldgroup.com.
Topics Trends Reinsurance Market
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