Global reinsurance market’s underlying ROE was above the cost of capital for the second consecutive year in 2023, improving to 14.3% from 12% in 2022, mainly due to lower combined ratios and higher running investment income.
Reinsurers’ ROEs now comfortably exceed the industry’s cost of capital. Gallagher Re’s Reinsurance Market Report found that the headline ROE increased to 20% from 7% a year ago, the highest level in the past decade.
Taking into account exceptional 2023 profits, the industry has generated an ROE above the cost of capital for the 2017-2023 period cumulatively.
Michael van Wegen, Head of Client and Market Insights (International), Global Strategic Advisory at Gallagher Re
Gallagher Re’s report noted that the combined ratio of this group improved by 5.7 percentage points to 88.9% in 2023, driven by a decrease in natural catastrophe losses, a better accident year loss ratio excluding natural catastrophes, and a slight increase in the effect of reserve releases.
The reinsurers reportedly had a better experience with natural catastrophes compared to overall insured losses, which Gallagher Re estimates to be $123bn in 2023.
In the last three years, SUBSET companies have carried a smaller proportion of these losses, due to higher attachment points and the nature of the 2023 catastrophe losses, which were mainly secondary perils rather than landfalling US hurricanes.
Key findings from this report
- Global reinsurance dedicated capital totalled USD729 billion at full year 2023, a rise of 12% versus the restated full year 2022 base. Growth was driven by both the INDEX companies and non-life alternative capital.
- Gallagher Re’s in-depth analysis of a subset of 16 reinsurers shows the reported combined ratio improved to 88.9% (2022 FY: 94.6%). The underlying combined ratio also continued to improve, to 96% (2022 FY: 98.5%).
- The reported ROE rose strongly in 2023 FY, from 7.1% to 20.2%, largely spurred by a higher investment gains yield and a lower impact from natural catastrophes.
- Following exceptionally strong profitability in 2023, reinsurers have now fully recouped for weaker profits in 2017-2020.
- The underlying ROE was up materially to 14.3% (2022 FY: 12.0%), supported by improved underlying underwriting margins and higher running investment income.
- Whether viewed on a headline or underlying basis, reinsurers’ ROEs comfortably exceed the industry’s cost of capital.
The reinsurance broker’s report also said that the underlying combined ratio improved to 96%, the lowest since 2014, due to lower attritional losses and normalized natural catastrophes.
The improved underwriting performance and ROE strengthen the reinsurance industry’s resilience and enable reinsurers to better absorb potential earnings volatility from, for example, natural catastrophe losses.
The reported combined ratio reduced 5.7 percentage points (ppts) to 88.9% in 2023 FY (2022 FY: 94.6%, restated for IFRS 17), despite a moderate increase in the expense ratio, thanks to a lower impact from natural catastrophes (-3.5ppts), a 2.0 ppts reduction in the current-year attritional loss ratio and slightly increasing reserve releases. The favorable impact from discounting remained stable.
The better natural catastrophe experience of the reinsurers stands in sharp contrast to overall insured natural catastrophe losses, which Gallagher Re estimates remain elevated at USD123B5 in 2023.
SUBSET companies have carried a reduced proportion of these losses over the last three years, from 9.2% in 2021 FY, to 8.0% in 2022 FY and 7.3% in 2023 FY. This reflects higher attachment points and the nature of 2023 catastrophe losses which were dominated by so-called “secondary” perils rather than by landfalling US hurricanes.
On an underlying basis, the combined ratio continued its downward trend, from 98.5% to 96.0%. This is the strongest level achieved since the launch of the Reinsurance Market Report in 2014 and was primarily driven by a lower current-year attritional loss ratio and normalized natural catastrophe load.
