Global reinsurers appetite for catastrophe risk likely to increase
The world’s 20 largest reinsurers – which includes 13 with significant Bermuda operations – will deploy more capital towards catastrophe risk in 2023 and 2024, according to a report from Standard & Poors.
But S&P Global Ratings said in a report entitled “Catastrophe Risk Appetite Varies Among Global Reinsurers” that reinsurers are divided between taking on more catastrophe risk and continuing to reduce volatility.
S&P Global Ratings credit analyst Charles-Marie Delpuech said: “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 cedants, while higher retrocession cost could lead reinsurers to ceding less of their risk," said.
The report noted that improved underwriting margins and rising investment returns, coupled with still-robust capitalisation (though lower than last year), were 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," Delpeuch added. "In our view, this would translate into an annual insured natural catastrophe loss of about $85 billion for the entire insurance industry."
S&P said that market volatility and uncertainty through 2022 were marked by a rapid rise in interest rates and the Russia-Ukraine conflict and resulted in limited availability of capital to be deployed.
“At the same time, we think that many reinsurers focused on maintaining a reasonable level of volatility on their balance sheet, so they could benefit from better returns without taking on more risk<” the report said. “The average contraction was 7% for those reinsurers that opted to reduce absolute net exposure to a 1-in-250-year aggregate loss.”
S&P noted that some reinsurers began putting in more “capital at risk” in the January 1 renewals and increased absolute net exposure by about 14% on average.
“As a result of these changes, we estimate that average capital at risk has remained almost unchanged across the top 20 group of reinsurers. On average, S&P Global Ratings total adjusted capital exposed in January 2023 stood at 25%, compared with 24% one year before.”
S&P said capacity for retrocession, including use of third-party capital, continues to be constrained as of January 2023, with continuing hardening pricing conditions.
“Data at January 1, 2023, suggest that reinsurers have tended to reduce their use of retrocession for tail risk in 2023 as a result,” the report said. “We expect that rates in the retrocession market will continue to increase. This means reinsurers may have to cede proportionally less of the risk if it becomes too expensive. We think those reinsurers that will aim to deploy more capital in 2023 and 2024 may decide to rely less on retrocession.”
The report added; “As demand continues to rise with cedants experiencing increased volatility, the global reinsurance sector is more optimistic because it enjoys improved and more certain pricing conditions. With strong returns expected in 2023, reinsurers that have been cautious during the recent turbulent times may seize the opportunity to deploy more capital and grow their property catastrophe book.
“An active second half of 2023, coupled with additional inflationary pressure, may nonetheless slow appetite for many to further grow their exposures to natural catastrophes.”
S&P’s listing of top 20 global reinsurers (alphabetical):
Group 1: Large global reinsurers
Hannover Rueck
Society of Lloyd's
Munich Reinsurance Co.
SCOR
Swiss Reinsurance Co.
Group 2: Midsize global reinsurers
Axis Capital
Everest Group
Fairfax Financial
PartnerRe
RenaissanceRe
Group 3: Other (re)insurance groups
Arch Capital Group
Ascot Group
Aspen Insurance
China Reinsurance (Group)
Convex Re
Fidelis Insurance
Hiscox Insurance
Lancashire
Markel Group
SiriusPoint
