The reinsurance industry has had a turbulent year, but it has survived the greatest financial catastrophe since the Great Depression remarkably well. Balance sheets have stabilized and have even begun to improve this year. Despite an average loss of capital of 18 percent, a string of reinsurer failures — feared by many — never materialized. Strong capital positions enabled reinsurers to absorb the financial and natural shocks of 2008 and continue to bear risk without interruption.
Rigorous risk management practices contributed substantially to the reinsurance industry’s ability to recover in 2009. Capital was deployed with discipline, and industry innovation was tapped to improve catastrophe and capital models, equipping riskbearers to prepare for future shocks and protect their balance sheets. Even when financial markets were at their tightest, carriers used the tools at their disposal to optimize their capital, making the most of recently limited resources.
As financial markets continue to thaw, fears of a capital famine should continue to abate. This development in conditions has led to a decline in volatility and the successful completion of debt and equity issues. Alternative sources of capital, such as catastrophe bonds, have returned from the quiet of the fourth quarter of 2008, though not in sufficient volume to have a profound impact on risk-transfer supply. Still, these factors point to continued stabilization.
The gradual return to normalcy does not have to be treated as an end-point for the reinsurance industry. Rather than remain constrained by the traditional dynamic of catastrophe loss-driven pricing, the sizeable increases in uninsured economic losses over the past 70 years suggest that there are plenty of risks remaining to be covered — and prospects for outsized industry growth. Entering markets currently underserved — such as property catastrophe in the Asia-Pacific region — offers the possibility of industry-leading results. With the correct mix of modeling and risk manager judgment, carriers will be better prepared to assume these risks and deliver the rewards to their shareholders.