Extreme events pose volatility issues for reinsurers, claims S&P
Reinsurers are now twice as likely to report an underwriting loss due to natural disaster as they were in 2012, according to a new statement from rating agency Standard & Poor’s (S&P), adding that while reinsurers' balance sheet exposure to extreme natural events remains largely unchanged, earnings exposure has increased to 0.85x from 0.69x.
The rating agency said that it considers that the sector's extremely strong capital position makes it resilient to extreme events, and consider that 13 of the 20 global reinsurers we rate are likely to maintain a capital adequacy of at least 'BBB' following a one-in-250-year aggregate loss from natural disasters.
"Global reinsurers' exposure to unpredictable and high-severity natural catastrophe events is a major driver of reinsurers' earnings and capital volatility, and while we are seeing capital at risk reduce slightly as a percent of equity, earnings exposure is up," said S&P Global Ratings analyst Charles-Marie Delpuech.
According to S&P global, reinsurers saw losses from natural disasters rise materially in 2016 to $54 billion from the relatively low levels of $36 billion in 2015.
Looking at global reinsurers' catastrophe risk exposure in 2017, S&P noted that the sector's extremely strong capital adequacy continues to provide some cushion to the industry, but also that some reinsurers are more exposed and sensitive to the risk than others. The rating agency said that seven out of the 20 reinsurers it rates might experience erosion of their capital base due to an annual aggregate loss in the 1-in-10-year return period range in 2017, while in 2016 S&P did not project any to be at threat.
"Given that prices are continuing to soften across all lines of business and global property catastrophe prices were down about 4 percent-6 percent during 2017 renewals, we consider more-frequent catastrophe losses will become a bigger threat to underwriting profits and capital than they were in the past," said Delpuech. "Reinsurers are therefore likely to see heighten volatility in earnings, in our view." Those more exposed might have to rethink their appetite for property catastrophe risk in order to sustain their earnings and capital base, as well as defend their competitive positions."
