The reinsurance industry is struggling to cover its cost of capital and needs to improve returns, given the substantial risks it covers.

That was one of the takeaways from the AM Best Bermuda Insurance Market Briefing in Hamilton this week.

Analysts from the New Jersey-based rating agency gave an overview of the island’s flagship industry before an audience at the Hamilton Princess & Beach Club.

The five-year average return on equity of the global reinsurance market is 8.3 per cent, said Robert DeRose, senior director at AM Best. This was impacted by a negative 0.3 per cent return in 2017, a huge year for catastrophe losses.

However, Mr DeRose pointed out that trend for annualised RoE has been falling steadily since 2013, when it was 13 per cent, through the first half of this year when it was 7 per cent.

Driving the decline in profitability were a tightening of underwriting margins and lower investment earnings linked to persistently low interest rates, as well as increased equity on the balance sheet, Mr DeRose said.

He added: “When you consider that their cost of capital is about 7.5 per cent, it really does demonstrate that reinsurers are under pressure to find ways to improve their returns.”

Mr DeRose said that if loss reserve developments were excluded, then reinsurers’ five-year average RoE would fall to 4.5 per cent.

“They need to do better than that, given the risks they take,” he said.

Last year was an outlier, generating $131 billion of insured natural catastrophe losses, compared to the ten-year average of $51 billion, Mr DeRose said.

Mr DeRose said that consolidation is likely to continue in the reinsurance industry, alternative capital is driving change and the market is still largely influenced by a handful of global players.

It’s not all doom and gloom though. Increasing interest rates will offer opportunities for reinsurers to generate more income from their conservatively invested portfolios, for example.

Mr DeRose added: “My observation is that reinsurers are still pretty opportunistic and innovative and they have the capacity to weather these headwinds over the near term.

“The majority of our ratings still have stable outlooks and that’s because their capital strength and their ability to manoeuvre through challenging market dynamics.”