Tag Archives: combined ratio

Insurance ROEs earned the hard way

Munich kicked off the year end reporting season for insurers this week with a pre-announcement of results that beat their guidance. For non-life reinsurance, low large and catastrophe losses plus 5% of prior year releases mean that the 92% combined ratio is only 1% higher than 2012 for Munich Re despite the weak pricing market.

I am expecting to see strong non-life results across the market as it looks like attritional loss ratios for 2013 are lower than average which, with low catastrophe losses, should make for low combined ratios in 2013.

For specialty nonlife insurers and reinsurers, I would expect combined ratios to come in the mid to high eighties on average with ROEs in the low to mid teens. The relatively low investment returns are hurting ROEs which in the past would of given high teens or low twenties for such underwriting ratios.

The business models of the European composite reinsurers are not as sensitive to combined ratio with the life side providing more stable earnings. I would expect most of the large composite reinsurers to come in in the low 90s or high 80s (Munich’s figure was 92%) whilst giving ROEs similar to their non-life specialty brothers in the low to mid teens.

The graph below illustrates that todays combined ratios don’t mean the high ROEs they once did (2013 figures are as at Q3).

click to enlargeInsurance ROEs and Combined Ratios 2004 to 2013

 

Another look across insurance cycles

Following on from a previous post on insurance cycles and other recent posts, I have been looking over the inter-relationship between insurance cycles in the US P&C market, the Lloyds of London market and the reinsurance market. Ideally, the comparisons should be done on an accident year basis (calendar year less prior year reserve movements) with catastrophic/large losses for 2001/2005/2011 excluded but I don’t (yet) have sufficient historical data to make such meaningful comparisons.

The first graph shows calendar year combined ratios in each of the three markets. The US P&C figures contain both consumer and commercial business and as a result are less volatile with the other markets. For example, Lloyds results are from specialty business classes like energy, marine, credit & surety, A&H, specialty casualty, excess and surplus (E&S) lines and reinsurance. The reinsurance ratios are those for most reinsurers as per S&P in their annual global reports. For good measure, I have also included the US real interest rates to show the impact that reduced investment income is having on the trend in combined ratios across all markets. Overall, ratios have been on a downward trend since the early 1990s. However, if catastrophic losses and reserve releases are excluded ratios have been on an upward trend since 2006 across Lloyds and the reinsurance markets. Recent rate increases in the US such as the high single digit rate increases in commercial property & workers comp (see Aon Benfield January report for details on US primary rate trends) may mean that the US P&C market comes in with a combined ratio below 100% for the full 2013 year (from 102% and 106% in 2012 and 2011 respectively).

click to enlargeInsurance Cycle Combined RatiosAs commented on above, the US P&C ratios cover consumer and commercial exposures and don’t fully show the inter-relationship between the different business classes across that market. The graph below shows the calendar year ratios in the US across the main business classes and paint a more volatile picture than the red line above.

click to enlargeUS Commercial Business Classes Combined Ratios