Reinsurance News

JP Morgan critiques industry’s approach to nat cat losses

23rd May 2022 - Author: Pete Carvill

JP Morgan has posited that the reinsurance and insurance industry should look again at how it categorises catastrophe losses.

J.P MorganWhile losses have increased in recent years, JP Morgan said it was commensurate to look not at the volume of losses but to compare losses with premiums.

It wrote: “Nominal insured losses should increase naturally due to rising insured values and increasing global GDP. If we compare insured catastrophe losses to global insurance premiums, the trend shows that losses have increased in recent years. However, the 10-year average trend of insured natural catastrophe losses to premiums does not show a particularly concerning conclusion, in our view with this close to 3% of industry premiums.”

While JP Morgan said there was no issue at an industry level about natural catastrophe losses, it did seed some concern about the sector at the company level.

It said: “In the past five years, the global reinsurers have seen natural catastrophe losses that are on average 3.5ppts above their budgets, compared to 0.4ppts above budgets on average over a 10-year period.”

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It added: “We believe that estimating a prudent nat cat budget is a key factor for the sector, particularly for the reinsurers. Margins in reinsurance on a normalized basis are relatively thin (average 5% margin based on 22e normalized combined ratio guidance). Therefore, if a catastrophe budget is even 1ppt higher than expected, it could potentially mean that assumed underwriting profits are 20% overstated.”

However, the firm said that it saw no real upward creep in natural catastrophe losses compared to the expectations of insurers, saying that reinsurers had increased their budgets in this area. Mitigating factors including pricing, which it said has been on a positive trend since 2017; the adjustment of terms and conditions to manage risk; and the opportunity for growth from a higher potential frequency of events.

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