In 2023, global insured losses from natural catastrophes exceeded $100 billion for the fourth year in a row, highlighting the financial burden imposed by increasingly frequent natural disasters.

According to Standard & Poor’s global credit rating agency estimates, a large portion of these losses resulted from moderate-intensity convective storms, especially in the United States.

However, reinsurers faced lower exposure to these losses in 2023, thanks to structural changes in reinsurance practices and strategic actions taken during renewals. These adjustments included climbing reinsurance towers, offering reduced beneficiary limits, reducing exposure to low-yield events, tightening terms and conditions, reducing overall coverages, and reducing re-pricing risks.

Get the latest reinsurance news straight to your inbox twice a week. Sign up here

S&P noted that these measures helped reinsurers achieve strong overall performance in 2023 and the first half of 2024, while primary insurers, particularly in the United States, were able to cope with increased retentions and absorb the majority of SCS-related losses.

Over the past 18 months, Standard & Poor’s has not downgraded any reinsurers due to natural catastrophe losses, but some U.S. primary insurers have seen negative rating actions as high natural catastrophe losses have impacted their underwriting performance.

As demand for catastrophe reinsurance continues to rise, it will be important to monitor whether reinsurers can maintain underwriting discipline under competitive pressures, which could impact future profitability.

According to the Sigma Report by the Swiss Re Institute, global insured losses from natural catastrophes grew at an average annual rate of 5.9% from 1994 to 2023, outpacing global economic growth, which averaged 2.7% per year.

The report expects insured losses to continue to rise by 5% to 7% per year, consistent with trends observed over the past three decades. S&P highlighted that 2023 was the fourth consecutive year in which insured losses exceeded $100 billion, a level that can now be considered the norm.

In 2023, the highest insured losses did not result from any single catastrophic event but from a high frequency of moderate-severity events, including the Maui wildfires, which caused $3 billion in insured losses—the largest ever in Hawaii.

Losses from secondary perils, including natural catastrophes, rose by about 53% to $87 billion in 2023, accounting for about 81% of insured losses from natural catastrophes globally. This is double the 43% share reported in 2022, S&P noted.

Natural catastrophe insurance losses reached $64 billion in 2023, a record amount that includes 60% of global insured losses from natural catastrophes—more than double the 10-year average. The majority of these losses, about 84%, occurred in the United States, although Europe and other regions also saw increases.

Hail damage, which accounts for 50% to 80% of SCS’s losses, was the main culprit, Standard & Poor’s said. In Europe, SCS’s insured losses have exceeded $5 billion annually over the past three years, with Germany, France and Italy the worst affected.

Read more: How will the global property catastrophe reinsurance market perform in mid-2024?

Standard & Poor’s has identified several factors contributing to the rise in insured losses worldwide from natural disasters, including economic and population growth, urbanization, inflation, and the potential effects of climate change. The concentration of high-value properties in disaster-prone areas, such as coastlines and flood plains, also plays a role.

While the exact causes of these trends are debated, Standard & Poor’s has noted that the growth in motor insurance loss costs is primarily due to inflation, followed by economic and population growth, which drives up the value of insurable assets. Climate change is also a contributing factor, though it is difficult to quantify.

Since 2017, the reinsurance sector has been challenged by the increasing frequency and severity of natural catastrophes. However, in 2023, the market has seen a major shift, with reinsurers implementing structural changes such as raising attachment points and managing limit files more carefully.

Standard & Poor’s said these measures have improved reinsurance underwriting performance, with natural catastrophe losses in 2023 falling short of the threshold needed to trigger reinsurance policies, leaving primary insurers to bear the brunt of the losses.

Despite the continued high level of insured losses globally, reinsurers have seen the impact of natural catastrophe losses on their underwriting earnings decline. According to Standard & Poor’s, the combined impact of 10 selected reinsurers has declined by 5.5 percentage points in 2023, compared to the average of the previous four years.

In contrast, primary insurers in the United States saw an increased impact of natural catastrophe losses on their underwriting results, as they retained more risk.

Looking ahead, S&P believes that the events of 2023 are likely to impact risk management and mitigation strategies, with primary insurers seeking solutions beyond price increases. These strategies may include improving risk models, improving the quality of exposure data, increasing deductibles, and enhancing the physical strength of insured assets.

However, Standard & Poor’s noted that secondary risks such as SCS are not as well modeled as primary risks, making it difficult for insurers and reinsurers to get a comprehensive view of the risks.

While the exact reasons for the rising loss costs remain debated, Standard & Poor’s stressed that understanding and managing natural catastrophe risks is essential for both insurers and reinsurers in the current environment.

What do you think of this story? Feel free to share your comments below.

Get the latest reinsurance news straight to your inbox twice a week. Sign up here