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Reinsurer capital strength a cushion against loss volatility: S&P

18th October 2021 - Author: Matt Sheehan

Analysts at S&P Global Ratings have reported that the very strong capital adequacy of the global reinsurance sector continues to provide it with a cushion against catastrophe risk and other large losses, which have proven extremely volatile in recent years.

“The sector remains resilient to extreme events because of its robust capital,” S&P said in a new report.

The rating agency noted that 13 of the top 21 global reinsurers would maintain a buffer at their current capital adequacy level, even if a 1-in-100-year event were to cause losses in excess of $250 billion across the industry.

On average, S&P reports that reinsurers’ property-catastrophe risk appetite at a 1-in-250-year return period was broadly flat, at 27% of shareholder equity, although some reinsurers saw reductions of around 5 percentage points.

And while global reinsurers have maintained their underwriting discipline, it expects earnings volatility could be higher than historically observed, where exposure has increased.

“The Top 21 global reinsurers saw exceptional insured losses from COVID-19 of about $20 billion in 2020, said S&P Global Ratings credit analyst Charles-Marie Delpuech. “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.

“Half of the Top 21 global reinsurers rated by S&P Global Ratings chose to either maintain or increase their natural property-catastrophe exposure relative to their capital in 2021,” Delpuech added.

“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.”

Based on their average share of market losses over the past five years, S&P expects profit before tax at most reinsurers to provide a buffer against sizable insured industry losses.

But that said, reinsurers that have higher risk appetites and subdued returns would likely see their profit before tax depleted more quickly than peers, it warned.

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