Reinsurance: Robust capitalisation in 2021

Strong underwriting and investment performance by reinsurers in 2021, aided by continued rate improvement in nearly all primary insurance lines, drove total capital dedicated to the global reinsurance sector to USD 728 billion at year-end. This is up 8.4 percent from 31 December 2020, according to the latest Reinsurance Market Report from Gallagher Re.

The 2021 performance brings the sector’s total capital growth since 2015 to 70 percent, or six percent per year. Going back to 2014, there is a clear trend of capital, or ‘supply’, growing faster than demand and this was again apparent in 2021.

Reinsurers’ weighted average reported combined ratio was 97.6 percent, a sharp improvement from the COVID-19-impacted 104.1 percent in 2020. While COVID-19 continued to impact daily lives last year, it barely registered in terms of reinsured losses due to prudent reserving undertaken by companies in the prior year.  The sector did absorb a heavy load of natural catastrophe losses, although these were no worse than the latest five-year average.

Reinsurers’ underlying combined ratio, excluding prior year development and normalising for natural catastrophe losses, improved from 100.7 percent to 99.8 percent, the first time it has been sub-100 percent since 2014. While inflation is a growing concern, to date rate increases have outstripped claim trends.  This drove down loss ratios and the strong premium growth also improved expense ratios.

Average Return on Equity improved markedly, from 2.7 percent to 11.4 percent on a reported basis, and from 1.3 percent to 6.2 percent on an underlying basis. That said, the industry’s underlying RoE does not yet meet its cost of capital, which exceeded eight percent in 2021.

James Kent, Global CEO, Gallagher Re, said: “The 2021 result is good news for reinsurers and insurers alike.  Reinsurers faced another year of significant natural catastrophe losses, yet still came out with a robust and improved performance across their overall portfolios. Insurers in turn benefited from the strong capitalisation and resilient performance of the reinsurance sector.”