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Reinsurers show mixed approaches to CAT risk -- S&P

Global reinsurers are ready to take on more natural catastrophe risk, although contrasting approaches toward catastrophe risk remain, S&P Global Ratings says in a report.

The report, titled "Catastrophe Risk Appetite Varies Among Global Reinsurers", says that the global property catastrophe reinsurance business continues to observe pricing correction following six years of elevated losses.

Amid continued variations in catastrophe risk appetite, more than half of the top 20 global reinsurers maintained or reduced their natural catastrophe exposures during the January 2023 renewals, despite the improved pricing terms and conditions and rising demand.

"We expect the top 20 global reinsurers to deploy more capital toward catastrophe risk in 2023 and 2024, because of continued strong demand from cedents, while higher retrocession cost could lead reinsurers to cede less of their risk," S&P Global Ratings credit analyst Charles-Marie Delpuech said.

Meanwhile, improved underwriting margins and rising investment returns, coupled with still-robust capitalization (though lower than last year), are providing further buffer against exceptional shock.

"For 2023, we expect the property catastrophe business to contribute about 2.5 percentage points to return on equity for the top 20 global reinsurers if losses remain within the annual budgets," added Mr. Delpeuch. "In our view, this would translate into an annual insured natural catastrophe loss of about $85bn for the entire insurance industry."

Global reinsurers pull back from Nat CAT cover — Fitch

Fitch Ratings says that global reinsurers are cutting back on the cover they provide against medium-sized natural catastrophe risks due to investor pressure after several years of large catastrophe losses and improved profitability in other parts of the market. Some companies were already retreating from the property-casualty market in 2022 but even the strongest reinsurers have now pulled back, largely through tightening their terms and conditions to limit their aggregate covers and low layers of natural catastrophe protection. This leaves primary insurers much less protected against secondary peril events. However, reinsurers still offer ample cover against the most severe events. The reinsurance market appears to have returned to its pre-soft market state of providing capital protection for cedents, rather than earnings protection. Natural catastrophe business has become largely loss-making in recent years as prices have failed to keep pace with increasingly frequent, severe and volatile weather-related losses due to climate change. This has reduced reinsurers’ appetite to provide natural catastrophe cover, particularly as other business lines are now benefitting from price rises that are higher than claims inflation. Tighter terms and conditions for natural catastrophe cover are a structural improvement that should benefit reinsurers’ risk profiles in the medium term as they are unlikely to be quickly reversed even when market conditions change. The 18 non-life reinsurers monitored by Fitch reported strong underwriting profitability in 1H2023, with an aggregate reinsurance combined ratio (claims and expenses to premiums) of 88% (1H2022: 89.4%). This was driven by the above-claims-inflation price increases in many business lines, as well as the lower natural catastrophe burden as cedents retained more of the losses themselves. The aggregate ratio included moderate losses of 6.7ppt from natural catastrophes. Reinsurance price momentum continued during the June and July 2023 renewals. US property-catastrophe markets had the largest price rises, with 30%-75% increases for loss-hit business and 10%-40% for loss-free business. In contrast, premium rates for casualty lines were broadly stable, reflecting the greater capacity allocated to them. Fitch expects reinsurers to maintain strong underwriting discipline despite higher interest rates and for reinsurance market hardening to persist into 2024. However, price increases are likely to be more moderate than in 2023 as rate adequacy has generally been reached through several rounds of hardening since 2018.

Separately, AM Best has said that with much harder market conditions since the start of 2023, interest in property catastrophe risks has renewed cautiously among reinsurers.


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