Global reinsurers have shown an increasing willingness to take on natural catastrophe risks, according to a recent report by Standard & Poor’s Global Ratings.

During January 2024 reinsurance renewals, 19 of the largest global reinsurers rated by Standard & Poor’s increased their exposure to natural catastrophes, with an average total increase in risk exposure of 14%.

However, a smaller group of reinsurers have chosen to reduce their exposure. This shift comes amid favorable reinsurance pricing and improved net investment income in 2023 and 2024, which has provided reinsurers with opportunities to deploy capital and expand their property catastrophe business.

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Standard & Poor’s, a global credit rating agency, noted that reinsurance companies’ strategies have varied in recent years due to the rising costs associated with natural disasters. In 2023, the Swiss Re Institute estimated global insured losses from natural disasters at around $108 billion, a figure higher than the long-term average for the insurance industry.

However, high correlations and a pattern of frequent but moderately large events in 2023 mean that primary insurers will bear a larger share of losses, particularly from severe storms in the U.S. The losses incurred by the global reinsurers rated by Standard & Poor’s were within the natural catastrophe load they had budgeted for.

S&P also highlighted several challenges facing the industry, including claims inflation, U.S. casualty claims, increased climate volatility, and financial market volatility. However, S&P’s analysis notes that global reinsurers’ strong capital adequacy and improved margins provide a buffer against major shocks, such as those caused by natural disasters.

The reinsurance sector’s capital is unlikely to be significantly impacted by a catastrophic event that could cause annual industry-wide losses in excess of $250 billion. Standard & Poor’s estimates that the sector would remain capitalized above the 99.99% confidence level even after such an event.

Property and Casualty Insurance Losses for the Reinsurance Sector

According to Standard & Poor’s, property catastrophe losses consistently reached or exceeded budgets between 2017 and 2022, prompting necessary price corrections. The large price increases in 2023, coupled with a decline in loss experience that year, have made property catastrophe a major contributor to the reinsurance sector’s strong results and have encouraged reinsurers to increase their exposure.

By mid-2024, insured losses are set to rise above the historical average, with notable events including severe storms in the US, an earthquake in Japan, and floods in the Middle East, China, Europe and Brazil. Munich Re reported global natural catastrophe insured losses of $62 billion in the first six months of 2024, compared with a 10-year average of $37 billion.

Despite these higher losses, S&P Global Ratings expects the property catastrophe business to contribute about three percentage points to return on equity on average across the group if losses from natural disasters remain on balance.

Read more: Globe P&C Reinsurers Announce Strong H1 2024 Earnings

The aggregate natural catastrophe loss budget in 2024 across S&P’s global reinsurance sample is approximately $19.2 billion, up from $17.1 billion in 2023 and $15.5 billion in 2022. This budget implies an industry-wide insured loss for the year of approximately $95 billion, which is in line with the 10-year historical average.

S&P expects reinsurers to remain cautious even as they expand their coverage. The trend of maintaining high correlations in response to high inflation and rising costs is likely to continue. Reinsurers are also expected to be selective in their exposure to higher frequency and medium-sized events while reducing the share of quotas and overall coverage offerings.

According to Standard & Poor’s, this approach has allowed reinsurers to reduce their share of losses to below the long-term estimate of 20% over the past few years.

The role of investment in reinsurance

Investment returns also played a crucial role in boosting reinsurers’ reserves in 2024. S&P Global Ratings expects combined pre-tax profits across the sample group to reach nearly $45 billion in 2024, up from $30 billion in 2023, assuming investment margins remain in line with base case assumptions and catastrophe losses do not exceed the $19.2 billion budgeted.

These projections suggest a total buffer of about $64 billion before capital depletion occurs in a severe stress scenario. S&P also expects companies to take measures to protect capital in such scenarios, such as suspending share buybacks.

Capital adequacy is expected to remain resilient even in the face of large loss events, according to Standard & Poor’s. Most reinsurers in the sample group are more likely to experience an earnings event than a capital event in a high-risk scenario.

S&P expects 17 of the 19 reinsurers in its sample to maintain their capital adequacy if aggregate losses reach the one-in-50-year level in 2024, up from 15 in 2023. This resilience is attributed to the reinsurers’ strong capital positions and disciplined approach to risk management.

S&P Global Ratings also noted that most reinsurers increased their exposure to natural catastrophe risks in 2023 and 2024, driven by recent price corrections and higher correlation points. However, a few reinsurers chose to either reduce their exposure or maintain it at previous levels, often guided by long-term strategies aimed at diversifying business lines and reducing underwriting volatility.

The high cost of reinsurance, coupled with constraints on reinsurance capacity, has led some reinsurers to reduce their use of reinsurance to cover extreme risks. However, alternative capital remains a key source of capacity, particularly for the reinsurance strategies of large global reinsurers.

Although demand for natural catastrophe coverage remains high, S&P Global Ratings expects reinsurers to remain optimistic about pricing conditions. But if rates weaken, reinsurers may be less willing to increase their exposure to natural catastrophes.

The second half of 2024 could put pressure on reinsurers to change terms, conditions or pricing, potentially prompting them to maintain a more disciplined approach.

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