Reinsurers’ appetite for natural catastrophe risks is growing, but discipline remains

According to a report published by S&P Global Ratings, leading reinsurers are showing a growing but disciplined appetite for natural catastrophe risks as a result of increased demand, better prices, more favorable terms and conditions and solid income from investments.

Most of the 19 largest global reinsurers rated by S&P increased their exposure to natural catastrophes during renewals from January 2024. “We saw an overall average increase in risk exposure of 14%, although a smaller group of reinsurers continued to are reducing theirs,” said the S&P report titled “Reinsurers Show Growing Appetite for Natural Catastrophe Risks.”

“Significant price increases, particularly in 2023, combined with reinsurers’ lower loss experience in 2023, made the property catastrophe business a major contributor to the overall strong industry results and encouraged reinsurers to increase exposure,” the report added.

However, if prices weaken, S&P said, reinsurers’ appetite to increase their natural catastrophe exposures “could decline rapidly.”

“For example, benign conditions in the second half of 2024 could increase pressure on reinsurers to change terms and conditions or reduce rates. We anticipate that this would cause (reinsurers) to hold back and maintain a disciplined approach,” it continued.

The report noted that improved underwriting margins, strong investment returns and robust capitalization “are expected to add to reinsurers’ already strong buffers against the one-time shock.”

Given the rising cost of natural catastrophes, reinsurers’ strategies have diverged in recent years, S&P said, citing Swiss Re’s estimate of global insured losses from natural disasters reaching $108 billion in 2023.

“While this is above the long-term average for the insurance industry, the higher attachment points – combined with a pattern of frequent but (medium-sized) events in 2023 – meant that much of the loss fell mainly on insurers mayors”.

Indeed, the report says, primary insurers have borne most of the losses from high-frequency severe convective storms (SCS) in the US.

Cushioned against shocks

S&P warned that credit inflation, US casualty claims, increasing climate variability and financial market volatility present headwinds for the industry – but the current capital position is strong.

“Overall, we believe that the capitalization of the reinsurance sector is unlikely to be affected by an event so severe that it would only be expected to occur once every 100 years and cause annual industry-wide losses of more than 250 billion dollars,” the S&P report said. “We estimate that the sector as a whole will still be capitalized above the 99.99% confidence level after such an event.”

S&P expects combined pretax profits (among the 19 largest reinsurers it rates) to total $45 billion in 2024, up from the $30 billion reported in 2023. That projection would occur if :

• Investment margins remain in line with S&P’s underlying assumptions and
• Losses caused by catastrophes do not exceed the budget of 19.2 billion dollars.

“This suggests that our group has a combined buffer of approximately $64 billion before capital depletion occurs in a severe stress scenario. In addition, we typically expect companies to take steps to protect capital in a stress scenario – for example, suspending share buybacks and other shareholder returns.”

Above average losses continue

So far this year, insured losses are above the historical average but within catastrophe reinsurers’ budgets, S&P said, noting that 2024 nat cats included SCS in the US; an earthquake in Japan; and flooding in the Middle East, China, Europe and Brazil.

“Munich Re, for example, reported insured global natural catastrophe losses of $62 billion in the first six months of 2024 – the 10-year average is just $37 billion.”

However, primary insurers are likely to absorb a larger proportion of losses given reinsurers’ moves to increase attachment points, S&P said.

The report said catastrophe reinsurers’ budgets have increased to accommodate higher demands for nat cat. “The combined natural catastrophe loss budget in 2024 for our sample group of global reinsurers is approximately $19.2 billion, up from $17.1 billion in 2023 and $15.5 billion in 2022 .”

S&P explained that this 2024 budget translates into an industry-wide insured loss for 2024 of about $95 billion – in line with the 10-year historical average.

The top 19 global reinsurers typically take 20 percent of the industry’s total insured catastrophe losses, the report said.

The 19 reinsurers analyzed in the report are divided into three groups:

• Group 1 of large global reinsurers: Hannover Re, Lloyd’s, Munich Re, SCOR and Swiss Re
• Mid-sized Global Reinsurers Group 2: AXIS Capital Holdings Ltd., Everest Re Group, Fairfax Financial Holdings and RenaissanceRe Holdings
• Group 3 of other reinsurance groups: Arch Capital Group, Ascot Group, Aspen Insurance Holdings, China Reinsurance (Group), Convex Re, Fidelis Insurance Holdings, Hiscox Insurance, Lancashire Holdings, Markel Group and SiriusPoint.