Many reinsurers ‘increase cat risk exposure’ to exploit 2019 price uptick, finds S&P Global

Most of the top 20 reinsurers have switched strategy to take advantage of the price uptick, seen during the April, June and July 2019 renewals, by increasing their exposure to catastrophe risk, a report from S&P Global has found.

The ratings agency said that higher premium rates driven by higher than average natural catastrophe losses in 2018 - up by 50 percent - have created “slightly improved conditions” prompting many reinsurers to step away from their retrenched positions.

Rates for property catastrophe increased by 15 to 25 percent on loss-affected accounts, for example. The report said that reinsurers' “very strong capital adequacy gives them a cushion against catastrophe risk exposure, despite the recent high insured losses”.

However, analysts expect risk discipline to win out, as global reinsurers' greater exposure to catastrophe risk “could heighten their earnings and capital volatility”.

Not all reinsurers chose to increase their exposure. The report said “a few stuck with defensive measures” and allowed their exposure to contract further, as they had in 2018.

But on average property-catastrophe risk appetite among reinsurers climbed to 29 percent of shareholder equity at a 1-in-250-year return period. In contrast some reinsurers saw reductions of more than 5 percentage points.

S&P Global found that alternative capital growth “seems to have paused, at least temporarily”, but it said this is not driving reinsurers to make big changes to their retrocession strategies.

“Retrocession remains a flexible way to shift exposure quickly. Although the market for retrocession has also shown signs of price hardening, with significant rate increases, reinsurance utilisation by primary reinsurers has been flat,” the report said.

The top 20 global reinsurers (see list below) took on about 20 percent of the total insured industry losses in 2018. S&P Global estimated aggregate losses in 2018 represent a level seen less than once in every 10 years (a 1-in-10-year loss) for the peer group.

“In aggregate, this peer group has budgeted catastrophe losses in 2019 of about $11 billion, or 7 percentage points of the combined (loss and expense) ratio. At this level, we forecast that this group would report pretax profits of about $22 billion in 2019, reflecting a consolidated buffer of about $33 billion before capital would be hit in a severe natural catastrophe stress scenario.”

Report analyst Charles-Marie Delpuech said: “Although global reinsurers have maintained their underwriting discipline, we expect earnings volatility could be higher than historically observed, where exposure has increased.

"The sector remains resilient to extreme events, but we expect a larger industry loss would hit more reinsurers. If a 1-in-100-year event hits, causing losses well in excess of $200 billion across the insurance industry, we expect only 12 of the 20 global reinsurers would maintain their current S&P Global Ratings capital adequacy level, as measured by our model.”

The findings were published in S&P’s report ‘Global Reinsurers Aim To Rebalance Their Natural Catastrophe Exposure’.

Top 20 reinsurers identified in the S&P report

Group 1: Large global reinsurers
Hannover Rueck
Lloyd's
Munich Reinsurance
SCOR
Swiss Reinsurance

Group 2: Midsize global reinsurers
Everest Re Group
Alleghany
AXIS Capital Holdings
Fairfax Financial Holdings
PartnerRe
RenaissanceRe Holdings

Group 3: Other re/insurance groups
Arch Capital Group
Argo Group International Holdings
Aspen Insurance Holdings
China Reinsurance (Group)
Hiscox Insurance
Lancashire Holdings
Markel
Qatar Insurance
Sirius International Group

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