MILLIRE_2019_Annual Report

Milli Re Annual Report 2019 57 Activities and Major Developments Related to Activities Financial Status Risks and Assessment of the Governing Body Unconsolidated Financial Statements Together with Independent Auditors’ Report Thereon Consolidated Financial Statements Together with Independent Auditors’ Report Thereon General Information Financial Rights Provided to the Members of the Governing Body and Senior Executives Research & Development Activities Total reinsurance capital, including both traditional and alternative capital, in the form of cat bonds, sidecars and ILWs increased by 7% and reached USD 625 billion by the end of third quarter 2019. Traditional capital, which was recorded as USD 488 billion by the end of 2018, attained 9% growth rate and rose to USD 532 billion. Declining by 4% compared to the end of previous year, alternative capital was registered as USD 93 billion, of which USD 15 billion was the trapped collateral reserved for the catastrophe losses occurred in 2017, 2018 and 2019. The losses arising from the secondary perils being in the first place, increased loss frequencies over the last couple of years, diminishing investment incomes, the issues such as climate change as well as loss of appetite of alternative capital players given the concerns on management of trapped capital, were the main drivers for the decrease. The high level of reinsurance demand kept prevailing during January 2020 renewals, predominantly as a result of major catastrophes which occurred in the past few years, as well as the increased loss frequencies and the legislations such as Solvency II that require robust capitalisation. Even though the supply adequately met the demand, it was observed that the reinsurance prices gained upward momentum globally as a consequence of the increased claim costs as well as the diminishing profit margins. While rate increases in the insurance market outpaced the price changes recorded in the reinsurance programmes, in order to get the full benefit of this development, majority of the proportional reinsurance buyers, particularly the big global companies, opted for increasing their retention levels. Buyers which were unable to achieve their target terms in respect of proportional programmes shifted their reinsurance structures to non-proportional treaties. Cost optimisation has become even more important over the last couple of years considering the new business models, technological developments and diminishing profit margins leading mergers & acquisitions to gain momentum. The main transaction of 2019 was Marsh&McLenan’s, decision to acquire JLT Group for USD 5.6 billion. As a result of this deal, which was completed at the beginning of April, Guy Carpenter and JLT Re were consolidated under the same roof; the new entity becoming the sector leader with a transaction volume of USD 100 billion. This acquisition being the only major transaction, it is observed that M&A activities were replaced by the strategic structural changes in 2019. On the other hand, in view of the unsatisfactory M&A opportunities, the demand for legacy markets increased, considering that some companies opted for withdrawing from unprofitable business lines. The Brexit process which has been initiated in 2016, accelerated right after the UK government reshuffle in 2019 and was officially approved in January 2020. Following the transition period, the final deadline for an agreement and reshaping the future EU-UK economic relationship has been envisioned as the end of 2020. Moreover, in consideration of the possible No- Deal Brexit option; even though many market players established subsidiaries in European Economic Area (EEA) and took necessary precautions in the last couple of years in order to secure the in-force agreement terms; nonetheless ultimate outcome of the Brexit for the insurance industry still remains to be ambiguous. Following the deterioration of results for 2017 and 2018 consecutively, 2019 first half year was profitable for Lloyd’s, owing to the positive impacts of the structural changes put into effect as of 2018 in order to improve the underwriting processes and the market monitoring systems. Nevertheless, high operational costs still remain to be one of the main factors which suppress the profitability. As part of its new 3 year strategic plan announced in September 2019 following the change in the management, Lloyd’s introduced the “Syndicate in a Box” which is an alternative to the conventional syndicate structure. This innovation enables new market players, who would bring added value to the market, operate under Lloyd’s with minimum operational workload and costs. The centralisation of services such as support for business development, access to Lloyd’s database, analytics and