Charles-Marie Delpuech London +44-20-7176-7967
Johannes Bender Frankfurt +49-693-399-9196
Half of the Top 21 global reinsurers rated by S&P Global Ratings, which are listed in table 3, chose to either maintain or increase their natural property-catastrophe exposure relative to their capital in 2021. This enabled them to benefit from firmer pricing conditions in the property catastrophe space. The other half stuck with defensive measures, contracting their exposure further, as they had in 2020. On average, reinsurers' property-catastrophe risk appetite at a 1-in-250-year return period was broadly flat, at 27% of shareholder equity, but some reinsurers saw reductions of around 5 percentage points.
Global reinsurers' very strong capital adequacy continues to provide the industry with a cushion against catastrophe risk exposure. The Top 21 global reinsurers saw exceptional insured losses from COVID-19 of about $20 billion in 2020. In addition, insured losses from natural catastrophes were at or above reinsurers' budget expectations for the fourth year in a row in 2020. 2021 is shaping up to exceed expectations again.
Although global reinsurers have maintained their underwriting discipline, we expect earnings volatility could be higher than historically observed, where exposure has increased. The sector remains resilient to extreme events because of its robust capital. If a never-seen 1-in-100-year event hits, causing losses in excess of $250 billion across the entire insurance industry, we expect 13 of the Top 21 global reinsurers would maintain a buffer at their current S&P Global Ratings capital adequacy level, as measured by our model. In this scenario, we anticipate the aggregated reinsurance sector would maintain its redundancy at the 'AA' confidence level.
Alternative capital is likely to remain a reliable and vital avenue to retrocede peak perils, but has increased in cost because of the loss experience during the past few years. So far, reinsurers' retrocession strategies have not materially shifted, but they could retain more risks if prices continue to harden.
The Top 21 peer group budgeted losses for 2020 of about $12.5 billion, representing about 6 percentage points of the combined (loss and expense) ratio. Overall, the 2020 global natural catastrophe insured losses stood at a high $81 billion, according to Swiss Re Sigma report. However, secondary perils like convective storms or wildfires were exceptionally frequent in 2020 and these generally produce small to midsize losses, which are typically retained by the primary insurance market. Therefore, the peer group picked up only about 15% of the industry's total insured catastrophe losses in 2020 (see chart 1), compared with a historical average of about 20% of these industry losses. The large global reinsurers (as defined in table 3) account for around two-thirds of the peer group loss market share.
Chart 1 | Top 21 Global Reinsurers' Share Of Total Industry Catastrophe Losses Dipped Sharply In 2020
*2011-2015 loss share is based on a comparable but different sample. Source: Swiss Re Sigma, S&P Global Ratings.
The group's aggregate losses were therefore broadly in line with their budgeted catastrophe losses for 2020. This marked the fourth consecutive year in which the Top 21 global reinsurers' annual budget has been consumed (see chart 2).
Chart 2 | 2020 Catastrophe Losses At Top 21 Global Reinsurers Were In Line With Budget
Source: S&P Global Ratings.
It has become more complicated to assess what a normal natural catastrophe year would look like, especially given the recent increase in loss activity. The complexity of the task means that industry estimates cover a wide range (see table 1). Our own estimate of global insured losses in an average catastrophe year is around $70 billion, and is based on historical figures and reinsurers' catastrophe budgets. We consider that unmodeled risks and perils, combined with the inherent difficulties in attributing extreme events and their frequency to climate change, contribute to risk and uncertainty regarding modeled expectations (see "Global Reinsurers Grapple With Climate Change Risks").
Table 1 | The Wide Range Of Average Global Insured Loss Estimates Highlights Uncertainty Assessing A "Normal" Year Expected annual loss from natural catastrophes (bil. $)
Source
Scope
Insured
Comment
Swiss Re Sigma
10-year average
79
Aon
21st century average
69
Willis
Average 2011-2020
66.5
AIR
2020 annual aggregate
100
Stochastically modeled by AIR
S&P Global Ratings estimate
2021 catastrophe budget
65-70
From budget estimate based on 20% market share for top 21 reinsurers
Natural catastrophe losses in the first half of 2021 were about $40 billion, according to Swiss Re, boosted by winter storm Uri in Texas, as well as hailstorms and wildfires. This is the second-highest first-half loss amount on record (the 10-year average is only about $33 billion). The year did not improve: Hurricane Ida caused estimated insured losses of $25 billion-$30 billion in August and European flood losses contributed a further $12 billion (see "Hurricane Ida Is Not Expected To Result In Rating Actions On U.S. Property/Casualty Insurers And Reinsurers," published on Sept. 1, 2021). We therefore forecast that 2021 will be the fifth year in which the reinsurance industry will fully consume its catastrophe budget.
The Top 21 reinsurance peer group budgeted about $13 billion for natural catastrophe losses in 2021. If losses were in line with the budget, we forecast that the group will post profits before tax of about $22.5 billion in 2021. In a severe stress scenario, this implies that the group has a buffer of about $35.5 billion ($22.5 billion plus $13 billion) before its capital would be depleted, assuming no management actions that we would typically observe, no dividends or other shareholder returns, and investment performance in line with our base-case assumptions.
Chart 3 | The Industry's Capital Surplus Suggests It Would Be Resilient To Stress Scenarios
PBT--Profit before tax. Source: S&P Global Ratings.
An aggregated loss experience equivalent to 1-in-10-years is likely to be about $22 billion for the peer group. Given that this is well above the Top 21 group's $13 billion natural catastrophe budget for the year, such an event may hit the sector's earnings.
An aggregated loss experience equivalent to 1-in-50-years, implying losses of around $41 billion, could be a capital event. This is well beyond 2017's record high aggregate losses, which were estimated at $35 billion for this group, on an inflation-adjusted basis. Under this scenario, we would still expect the industry to sustain a capital buffer above 'AA' level, as per our capital model, based on the capital as of year-end 2020 (see chart 3). This reinforces our view that capital remains a strength for the sector.
These represent an aggregate view of the industry--an earnings or capital event at an individual company could be triggered earlier, depending on its relative exposures.
About half of the Top 21 reinsurers increased their absolute net exposure to a 1-in-250-year aggregate loss by more than 10%. Conversely, other reinsurers made defensive moves, choosing to reduce their exposure to extreme events by more than 15%. Relative to their shareholders' equity, the changes have been less pronounced (see chart 5), which indicates that change in risk exposure has largely been supported by movements in individual reinsurers' shareholders' equity.
Despite the material exposure changes many individual reinsurers within the peer group made, we estimate that average capital-at-risk exposure was flat across the Top 21 reinsurers. Total shareholders' equity exposed in January 2021 stood at 27%, similar to the level one year before (see chart 4).
Chart 4 | Large Reinsurers Allow More Of Their Earnings And Capital To Be At Risk
Chart 5 | Approach To Risk Appetite Has Been Diverging
ppts--Percentage points. Source: S&P Global Ratings.
Earnings-at-risk exposure is defined as a 1-in-10-year modeled annual aggregate net loss, compared with normalized expected profits before taxes and net catastrophe claims.
Capital-at-risk exposure is defined as a 1-in-250-year modeled annual aggregate net loss against shareholders' equity as reported (including preference shares).
Based on their average share of market losses over the past five years, we expect profit before tax (including the catastrophe budget) at most reinsurers to provide some cushion against sizable insured industry losses (see chart 6). That said, reinsurers that have higher risk appetites and subdued returns would likely see their profit before tax depleted more quickly than peers.
Chart 6 | Normalized Earnings Give Reinsurers A Cushion*
PBT--Estimated normalized expected profit before tax. Impact estimate based on five-year average loss market shares. *Future experience may differ from historical experience as some reinsurers adjusted their exposure in 2021. Source: S&P Global Ratings.
Capital levels at individual reinsurers vary. Based on our aggregate view for the sector, we expect 15 reinsurers to sustain their S&P Global Ratings capital adequacy if aggregate losses are at the 1-in-50-year level in 2021. That said, such a scenario could lead six reinsurers to experience a deterioration in their S&P Global Ratings capital adequacy, unless they take action to manage their capital levels (see chart 7).
Chart 7 | Reinsurers' Capital Adequacy Resilience To Stress Varies
Notch represents a capital adequacy category as per S&P Global Ratings' criteria. Data as of Dec. 31, 2020. Source: S&P Global Ratings.
Retrocession remains a flexible and key strategic way to shift exposure quickly. Although rate increases in the retrocession market were significant, reinsurers have maintained their use of retrocession and a few reinsurers ceded significantly more exposure in 2021. We expect further rate hardening and will monitor whether global reinsurers gradually start to cede less of their exposure in the future. So far, we see no sign that they will do so.
As of Jan. 1, 2021, reinsurers ceded about half of their 1-in-250 exposure, on average. That said, average utilization rates conceal a wide spectrum of coverage. Large global reinsurers typically retrocede less risk, for example (see chart 8).
Chart 8 | Reinsurers Are Ceding Slightly More Of Their 1-In-250 Property Catastrophe Exposure
For all 21 reinsurers in the peer group, U.S. windstorm continues to represent the biggest peak peril. Nonetheless, we have observed a rebalancing of exposure. The relative contribution of this peril fell by 3 percentage points on average over the past two years.
Most reinsurers enjoy a significant level of risk diversification, in excess of 50%. They typically take on exposure across regions and peak perils (see chart 9).
Chart 9 | Global Reinsurers Catastrophe Exposure Is Dominated By U.S. Windstorm
In geographical terms, wind zone 3 (which includes Florida, Georgia, and North and South Carolina, as defined by S&P Global Ratings annual property catastrophe survey) represents the biggest exposure in the U.S. (see table 2).
Table 2 | Top 21 Global Reinsurers' U.S. Windstorm Catastrophe Exposure By S&P Global Ratings-Defined Zone
*S&P Global Ratings uses estimated figures for the few instances where the reinsurer does not provide zonal exposure.
Overall, reinsurance pricing has been hardening over the past couple of years, but at a decelerating rate. We expect the property catastrophe reinsurance pricing during the 2022 renewals to rise in reaction to the 2021 elevated losses, especially in the U.S. and Europe, helping to sustain some reinsurers' appetite to expand exposure and deploy more capital. That said, reinsurers' attitudes to catastrophe risk have clearly diverged. While some reinsurers are increasing their market shares, taking on increased catastrophe risk and leveraging their alternative capital vehicles, others are reducing their risk appetite for natural catastrophe, given the inherent volatility of this line of business. We expect this divide will likely widen in the upcoming renewals in 2022.
2021 will likely be the fifth year in a row that natural catastrophe activity exceeds reinsurers' average expectations. Reinsurers can hope that losses would normalize at some point, but for now, they are seeing unrewarded earnings and balance sheet volatility. It is not yet clear how long they will accept such an unpropitious situation.
Table 3 | Top 21 Global Reinsurers
Group 1: Large global reinsurers
Hannover Rueck SE
Lloyd's
Munich Reinsurance Co.
SCOR SE
Swiss Reinsurance Co. Ltd.
Group 2: Midsize global reinsurers
Everest Re Group Ltd.
PartnerRe Ltd.
AXIS Capital Holdings Ltd.
RenaissanceRe Holdings Ltd.
Fairfax Financial Holdings Ltd.
Alleghany Corp.
Group 3: Other (re)insurance group
Ascot Group Ltd.
Aspen Insurance Holdings Ltd.
Hiscox Insurance Co. Ltd.
Qatar Insurance Co. Q.S.P.C.
Lancashire Holdings Ltd.
Arch Capital Group Ltd.
Fidelis Insurance Holdings Ltd.
Sirius International Group Ltd.
Markel Corp.
China Reinsurance (Group) Corp.
