Reinsurers Show Growing Appetite For Natural Catastrophe Risks
This report does not constitute a rating action.
Sachin BhojaniLondon+44-20-3367-0539
Rising demand, improved pricing, and more favorable terms and conditions boosted reinsurers' appetite for property catastrophe risk during 2023. Most of the top 19 global reinsurers increased their exposure.
We expect global reinsurers to seize the opportunity to deploy more capital over the next two years, within strict limits.
Improved underwriting margins and sound investment returns, coupled with robust capitalization, are expected to add to reinsurers' already strong buffers against exceptional shock.
Based on the budgeted property catastrophe losses at the top 19 global reinsurers, we calculate that return on equity could benefit by 3 percentage points from this line of business in 2024.
While global reinsurers' natural catastrophe risk appetite has diverged in previous years, most of the 19 largest global reinsurers rated by S&P Global Ratings increased their exposure to natural catastrophes during the January 2024 reinsurance renewals. We observed an average overall increase in risk exposure of 14%, although a smaller group of reinsurers continued to reduce theirs. Favorable reinsurance pricing and improving net investment income in 2023 and 2024 have presented reinsurers with opportunities to deploy capital and expand their property catastrophe business.
Given the rising cost of natural catastrophes, reinsurers' strategies have tended to diverge in recent years. In 2023, another active year, Swiss Re Institute estimated global insured losses from natural catastrophes of $108 billion. Although this is above the long-term average for the insurance industry, higher attachment points--combined with a pattern of frequent but midsize events in 2023--meant that a large portion of the losses fell mainly on primary insurers. In particular, primary insurers bore a larger-than-usual share of the losses, stemming from the repeated and severe convective storms (SCS) in the U.S. Conversely, losses at our sample group of global reinsurers were well within their budgeted natural catastrophe load.
In our view, claims inflation, U.S. casualty claims, increasing climate variability, and financial market volatility present headwinds for the industry. However, global reinsurers' robust capital adequacy and improved margin cushion them against outsize shocks, such as those stemming from natural catastrophes. On aggregate, we consider the reinsurance sector’s capitalization unlikely to be dented by an event so severe that it would be expected to occur only once in 100 years and would cause annual industrywide losses exceeding $250 billion. We calculate that the sector, as a whole, would still be capitalized above the 99.99% confidence level after such an event.
As chart 2 shows, property catastrophe losses were at or above budget between 2017 and 2022 for our sample group (comprising 19 global reinsurers we rate). As a result, the sector saw much-needed price corrections. Significant pricing increases, particularly in 2023, combined with reinsurers' lower loss experience in 2023, made property catastrophe business a major contributor to the industry's overall strong results and encouraged reinsurers to increase their exposure.
So far, insured losses for 2024 are tracking above the historical average, including increasing SCS in the U.S.; an earthquake in Japan; and floods in the Middle East, China, Europe, and Brazil. Munich Re, for example, has reported global natural catastrophe insured losses of $62 billion for the first six months of 2024--its 10-year average is just $37 billion. That said, as in 2023, we expect the nature of the events to cause primary insurers to absorb a higher than usual share of the 2024 losses. As a result, we forecast that property catastrophe business will contribute about 3 percentage points to return on equity (ROE), on average, across the group if natural catastrophe losses remain within the budget.
For the fourth year in a row, global insured catastrophe losses exceeded $100 billion in 2023. Insured losses from SCS were the highest in recent history. The combined budget for natural catastrophe losses in 2024 across our sample group of global reinsurers is about $19.2 billion, up from $17.1 billion in 2023 and $15.5 billion in 2022. This 2024 budget broadly translates into an industrywide insured loss for the year of about $95 billion--in line with the historical 10-year average (see table 1).
Property catastrophe losses were at or above budget between 2017 and 2022.
Table 1 | Average global insured loss estimates continue to riseExpected annual loss from natural catastrophes (bil. $)
Source
Scope
2021 insured
2022 insured
2023
2024e
Comment
Swiss Re Sigma
10-year average
79
74
81
89
Aon
21st century average
69
84
90
AIR
2023 annual aggregate
100
106
123
133
Stochastically modeled by AIR
Munich Re NatCatService
Average 2014-2023
N/A
S&P Global Ratings estimate
2023 catastrophe budget
65-70
~75
~85
~95
From budget estimate based on 20% market share for top 19 reinsurers
e--Estimate. N/A--Not applicable. Source: S&P Global Ratings.
We expect reinsurers to remain cautious, even as they expand their exposure. In particular, we anticipate that they will continue to be restrictive on their exposure to higher frequency and midsize events and reduce quota share and aggregate cover offerings. In response to high inflation and rising costs, attachment points will remain high. Similar moves over the past four years have enabled our sample group to cut their loss share below our long-term estimate of 20% (see chart 3). The shift was exacerbated over 2021-2023 by the frequency of losses and the occurrence of only midsize events. Such a pattern, combined with higher attachment points, forced primary insurers to absorb a higher proportion of total insured losses.
Strong underwriting margins and improved investment returns are projected to strengthen reinsurers' buffers in 2024. We forecast combined pretax profits across our sample group of about $45 billion in 2024, up from the $30 billion reported in 2023, if:
Investment margins are in line with our base-case assumptions; and
Catastrophe losses do not exceed the $19.2 billion budgeted for them.
This suggests that our group has a combined buffer of about $64 billion before capital depletion would occur in a severe stress scenario. In addition, we typically expect companies to take action to protect capital in a stress scenario--for example, suspending share buybacks and other shareholder returns (see chart 4).
We predict that capital adequacy of reinsurers in our sample group would prove to be resilient if a significant industry loss event were to occur, where losses were comparable with those in 2017. Global insured natural catastrophe losses in 2017 were estimated at about $175 billion. Such events would still be much less severe than those in our one-in-50-year stress scenario. Indeed, even under our one-in-100-year stress scenario, we calculate that surplus capital at the 99.99% confidence level would likely remain intact across the global reinsurance sector, even though it would be a significant earnings event for the sector.
At the individual reinsurer level, we predict that most players would be resilient and experience an earnings event instead of a capital event in a severe scenario. Based on their average share of market losses over the past five years, another year of pretax profits is likely to bolster their already-substantial buffers against significant insured industry losses (see chart 5).
Capital levels and risk appetite vary by reinsurer, but resilience is increasing across our sample group. Of the 19 reinsurers, we forecast that 17 would sustain their capital adequacy, as assessed by S&P Global Ratings, if aggregate losses were to reach the one-in-50-year level in 2024 (15 in 2023). Chart 6 shows that such a scenario could cause a decline in capital adequacy at two of reinsurers in our group. It does not, however, show the impact of any measures that might be taken to manage capital levels.
A substantial number of reinsurers, including most of our sample group, demonstrated an increased appetite for natural catastrophe risk in 2023 and 2024. They were encouraged by the recent pricing corrections and higher attachment points. Overall, the increase in risk exposure among the top players is substantial, with an absolute rise in exposure of approximately 14%. As a result, average capital at risk has increased modestly.
At the same time, few players have chosen to either reduce their exposure to natural catastrophe risk or maintain it at the previous level. Some of these reinsurers are guided by long-term strategies that focus on diversifying business lines and reducing volatility in underwriting performance (see charts 7 and 8).
Earnings-at-risk exposure: 1-in-10-year modeled annual aggregate net loss, compared with normalized expected profits before taxes and net catastrophe claims.
Capital-at-risk exposure: 1-in-250-year modeled annual aggregate net loss against S&P Global Ratings' total adjusted capital.
Data from Jan. 1, 2024, in force book suggests that reinsurers are slightly scaling back their use of retrocession for tail risk, driven by increasing cost. Constraints on retrocession capacity, including use of third-party capital, and persistently tightening pricing conditions are likely to keep prices high in the retrocession market. If the high cost of retrocession persists, reinsurers could be forced to retain a higher share of risk.
That said, reinsurers still rely on retrocession, which is a critical component of their risk management strategies. The approach to retrocession varies widely, but as of Jan. 1, 2024, the 19 reinsurers within our sample group ceded roughly half of their one-in-250-year exposure, on a simple average basis. Major global reinsurers often opt to retrocede less risk than their peers (see chart 9).
At the same time, we observe that alternative capital continues to be a critical source of capacity and has further increased its importance, in particular for large global reinsurers' retro strategies (see chart 10).
While demand from cedents for natural catastrophe cover remains high, we expect reinsurers to remain optimistic regarding pricing conditions. While rates are favorable, the strong returns expected in 2024 could encourage reinsurers to continue deploying capital and expanding their property catastrophe portfolios.
However, if pricing weakens, reinsurers' appetite for increasing their natural catastrophe exposure could quickly wane. For example, benign conditions in the second half of 2024 could increase pressure on reinsurers to alter terms and conditions or lower rates. We anticipate that this would prompt them to hold back and maintain a disciplined approach.
Alternative capital continues to be a critical source of capacity.
Group 1: Large global reinsurers
Group 2: Midsize global reinsurers
Group 3: Other reinsurance groups
Hannover Rueck SE
AXIS Capital Holdings Ltd.
Arch Capital Group Ltd.
Society of Lloyd's (The)
Everest Re Group Ltd.
Ascot Group Ltd.
Munich Reinsurance Co.
Fairfax Financial Holdings Ltd.
Aspen Insurance Holdings Ltd.
SCOR SE
RenaissanceRe Holdings Ltd.
China Reinsurance (Group) Corp.
Swiss Reinsurance Co. Ltd.
Convex Re Ltd.
Fidelis Insurance Holdings Ltd.
Hiscox Insurance Co. Ltd.
Lancashire Holdings Ltd.
Markel Group Inc.
SiriusPoint Ltd.
Source: S&P Global Ratings.
Sachin BhojaniLondon+44-20-3367-0539sachin.bhojani@spglobal.com
Johannes BenderFrankfurt+49-693-399-9196johannes.bender@spglobal.com
Charles-Marie DelpuechLondon +44-20-7176-7967charles-marie.delpuech@spglobal.com
Tobia MarchiLondon +44-20-7176-0637tobia.marchi@spglobal.com
Taoufik GharibNew York +1-212-438-7253taoufik.gharib@spglobal.com
Maren JosefsLondon +44-20-7176-7050maren.josefs@spglobal.com
Vikas RathoreCRISIL Global Analytical Center, an S&P affiliate, Mumbai
Anisha ToleCRISIL Global Analytical Center, an S&P affiliate, Mumbai
