So why is everyone so glum?
The essential answer is that although catastrophe insurers -- and reinsurers that back them up -- are overflowing with cash, they have few ways to put it to work and grow their business. At the same time, new entrants are piling into the catastrophe business and undercutting any attempts by established players to increase prices.
All in all, it’s a potent mix of market forces that is hammering the insurance industry hard.
“With the competitive pressures and the amount of capital that is out there, I don’t see growth for a long time,” said Matthew Mosher, senior vice president of Rating Services at A.M. Best in Oldwick, New Jersey, at the Property/Casualty Insurance Joint Industry Forum in January.
The global reinsurance industry -- which essentially provides insurance for global catastrophe carriers -- is dripping with “abundant” capital, according to a report by Aon Benfield released in January. Global reinsurance capital hit a record $575 billion in January, which is up 5 percent year-over-year.
The coffers are overflowing as a result of high retained earnings and below-average catastrophe losses. Without a major catastrophe event on par with 2005’s Hurricane Katrina, insurers are unable to reload their capital base and demand higher prices. Global insured cat losses for 2014 were $34 billion, according to insurance broker Guy Carpenter, which is the lowest total in four years and 25 percent lower than 2013.
The result is consistently falling property/catastrophe insurance prices over the past several years. In fact, insurance prices have been dropping, with Guy Carpenter’s Global Property Catastrophe Reinsurance Rate-on-Line Index falling by 11 percent at the January 2015 renewals. This year’s insurance take-up was characterized “by lower rates, excess capacity and broader terms and conditions,” according to a report.
And while traditional insurers are attempting to battle traditional forces in the industry, they are also being battered by “non traditional” entrants into the catastrophe insurance market, including hedge funds and private equity players. Over the past three years, hedge fund titans such as John Paulson’s Paulson & Co. and Daniel Loeb’s Third Point catastrophe reinsurance operations in Bermuda are competing with established players and doing some damage of their own.
“The sustained influx of capital from new entrants and growth from traditional sources continues to reshape the reinsurance landscape’s capital structure and drive innovation in the form of insurance-linked securities (ILS) and collateralized aggregate solutions,” said David Priebe, vice chairman of Guy Carpenter, in the January report.
Even despite posting a “respectable” 8 percent return on equity in 2014, property/catastrophe insurers are much worse off than you may think, said insurance analyst V.J. Dowling of Connecticut-based Dowling & Partners.
“From a reported point of view, 2014 was reasonably good with a 8 percent return on equity in a 2 percent interest rate environment,” he said. “That’s not that bad. But reported results of the insurance industry are always a lagging indicator, and are not indicative of what is actually happening.”
The industry veteran then began stripping away the returns, including a basis point for low catastrophe losses, two basis points for reserve releases (“ As an industry we are taking more cookies out of the cookie jar than we are putting in”) and another basis point for discounting income on insurers’ “embedded income.”
“All those numbers together mean the industry earned a 5 to 6 percent ROE, [and] that is not consummated with the risk they are taking,” Dowling added.