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.
Meanwhile, 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.
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).”