Global reinsurers split on nat cat risk

The natural catastrophe business of global reinsurers has been reshaped by five years of losses that were higher than they anticipated, according to a report from Standard & Poor’s.

The year 2021 was the fourth costliest year on record for annual global insured losses, with Hurricane Ida one of the largest insured losses in U.S. history, Uri the biggest US winter storm in history, and the low-pressure weather system known as Bernd leading to the largest European flood on record.

“Half of the top 21 global reinsurers have increased exposure and the other half have made reductions, with the aggregate catastrophe budget rising almost 20% to $15.5 billion in 2022,” said S&P Global Ratings credit analyst Charles-Marie Delpuech.

Meanwhile, improved underwriting margins, coupled with sound capital, are providing further buffer against exceptional shock.

“This means that if insured losses remain within budget, the natural catastrophe business could add up to 2.5 percentage points to the sector’s return on equity in 2022,” Delpuech added.

The rating agency’s analysis finds that 14 of the top 21 global reinsurers would maintain a buffer at their current S&P Global Ratings capital adequacy level, even after a 1-in-100-year natural catastrophe loss.

Cat budgets on the rise, while some step away

The report finds that half of the top 21 global reinsurers are growing their natural catastrophe exposure in 2022, increasing absolute net exposure by close to 20%.

The other half are taking a more cautious and defensive stance by reducing their exposure.

This divergence in strategy reflects the growing cost of natural catastrophes: they have topped loss expectations in the past five years despite increases in reinsurers’ budget. This year, the top 21 on average increased budgeted loss expectations by almost 20%.

According to S&P, many reinsurers, in addition to allowing for exposure growth, have factored greater climate variability into their forecasts this year. This budget would broadly translate into an annual insured loss for the whole industry of about $75 billion, which aligns with the historical 10-year average, based on loss market share.

The rating agency also notes there was a large reduction in natural catastrophe exposure in January 2022 for about half of top 21 reinsurers, after they reassessed their risk exposures in certain markets and geographies.

The average contraction was 20% for those reinsurers that opted to reduce absolute net exposure to a 1-in-250-year aggregate loss. This suggests a clear, strategic derisking, according to the rating agency.