Climate losses hit insurers while reinsurers fight back

As the planet warms and more natural disasters occur, insurers face an increasingly difficult time.

In 2023, for the fourth consecutive year, global catastrophic insured losses exceeded $100 billion. The trend continues this year: In the first half of the year, losses reached $62 billion and are well above the 10-year average of $37 billion, according to a recent analysis by Munich Re.

This usually shouldn’t bother primary insurers, who can offset some of this risk by buying reinsurance. But they are finding it increasingly difficult to do so. In a world of climate change, inflation and rising property exposure, reinsurers have raised their prices and are demanding more favorable terms, such as increasing the level at which a policy will pay out.

And that means primary insurers are left in the lurch.

“Insurers are being forced to take on more risk,” said Charles-Marie Delpuech, insurance credit analyst at S&P Ratings. “It’s a structural change in the overall market.”

And the numbers show how much reinsurers are doing as a result. S&P data on the top 19 global reinsurers shows that while their annual share of natural catastrophe losses has historically been in the 20% range, it has fallen sharply over the past three years, sliding to around 10% in 2023.

The key reason is that the reinsurance industry has become more adverse to “secondary perils,” which are smaller but more frequent extreme weather events such as tornadoes, storms, fires and floods. These localized events are harder for the insurance industry to model and manage, in part because they are driven by climate change.

They are also responsible for an increasing share of insured losses. Severe convective storms alone accounted for about $70 billion of insured losses globally last year, according to an estimate by insurance broker Aon Plc. That equates to 59% of losses from all natural disasters.

Reinsurers were hit by secondary risk losses in 2021 and 2022, but have since reduced their exposure, Delpuech said.

By 2023, “a large share of losses fell mainly to primary insurers,” especially in the US, where the most severe convective storms occur, according to S&P. On the other hand, reinsurance losses were “well within their natural catastrophe budget.”

Delpuech points out that even if a once-in-100-year natural catastrophe were to occur, causing annual industry losses of more than $250 billion, most reinsurers would still be protected.

“We estimate that the sector as a whole will still be capitalized above the 99.99% confidence level after such an event,” S&P said.

The result is that reinsurers appear to be in a particularly strong position to eliminate both primary perils, such as a major hurricane, and secondary perils, to which they are less exposed.

Now that reinsurers feel they have found their footing, they have become emboldened to expand operations, but on their own terms. This means higher prices and tougher clauses for when a policy will be triggered.

Moody’s Ratings says it has become more bullish on reinsurers. On Tuesday, the firm raised its outlook for the global reinsurance sector to “positive” from “stable”, citing several factors, including higher premiums, tougher policy conditions and lower exposure to secondary risks.

Based on January renewals, the top 19 reinsurers increased their overall average exposure to natural catastrophe risk by 14 percent, according to S&P. Their combined budget for absorbing “nat-cat” losses also rose to about $19.2 billion in 2024, up from $17.1 billion in 2023 and $15.5 billion in 2022.

Global reinsurers are expected to deploy more capital over the next two years, S&P said. The industry gained its cost of capital in 2023 for the first time in four years and is likely to do so again in 2024 and 2025, “solidifying our stable view of the sector”.

Copyright 2024 Bloomberg.

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