Reinsurance News

Reinsurers divided on natural catastrophe risk: S&P

2nd September 2022 - Author: Pete Carvill

S&P Global Ratings has said that global reinsurers are parting ways on natural catastrophe risk, with half growing their exposure in this area over the course of the year.

S&P Global RatingsMeanwhile, the S&P said that the remainder are taking a more cautious and defensive stance by reducing their exposure.

The firm said that this divergence in strategy reflects the growing cost of natural catastrophes: they have topped loss expectations in the past five years despite increases in reinsurers’ budget.

This year, the top 21 on average increased budgeted loss expectations by almost 20%.

The firm said that rapid rises in interest rates, financial market volatility, inflation, and increasing climate variability are large risks for the industry.

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However, it said that global reinsurers’ very strong capital adequacy continues to cushion them against exceptional shocks–such as from natural catastrophe events.

If a severe 1-in-100-year event hits, causing annual losses more than $250bn across the entire insurance industry, it said it expected 14 of the top 21 global reinsurers would maintain a buffer at their current S&P Global Ratings capital adequacy level.

Referring to catastrophe budgets growing, S&P wrote: “The top 21 now budget about $15.5bn for natural catastrophe losses in 2022 (versus $13bn in 2021). If losses remain in line with budgets, we forecast the group will post pre-tax profit of about $22.5bn in 2022. In a severe stress scenario, this implies a buffer of about $38bn ($15.5bn plus $22.5bn) before capital depletion.

“That assumes companies take none of the actions we would typically observe in a stress scenario, such as suspending share buybacks or other shareholder returns, and investment performance remains in line with our base-case assumptions.”

Rising budgets, said the firm, may be reflective of having factored greater climate variability into their forecasts.

It added: “This budget would broadly translate into an annual insured loss for the whole industry of about $75bn, which aligns with the historical 10-year average, based on loss market share.

“It appears that reinsurers will fully use their insured loss budget in 2022, according to our half-year estimate of $35bn-$40bn (based on Munich Re, Aon, and Swiss Re).”

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