Profit squeeze could hit reinsurers if cat losses return to normal: S&P

The reinsurance sector will be exposed to higher capital and earnings volatility due to margin compression if annual losses from catastrophes return to normal levels, according to a report from S&P Global Ratings.

The report, ‘Global Reinsurers May Reassess Their Exposure If Annual Losses From Catastrophes Rise To Normal Levels’, suggest the sector’s extremely strong capital position in aggregate makes it more resilient to extreme events.

S&P further suggests that of the 21 global reinsurers under review, 15 are likely to maintain a capital adequacy of at least 'BBB' following a one-in-250 year aggregate loss from natural disasters.

S&P has also highlighted a fall in the demand for cedents for cover against high-probability exposure, and suggests most reinsurers have taken defensive actions, retroceding more of the high-frequency risk.

The rating agency said that as earnings deteriorate, however, some reinsurers' relative exposure to these one-in-10 year events has increased.

The report states that technical profitability, on a normalised basis, is deteriorating to such a degree that reinsurers are now twice as likely to fail to break even in a calendar year as they were in 2012, due to their exposure to catastrophe risk.

The report states: "In our view, if reinsurers faced a series of midsize catastrophe events, resulting in a slightly above average catastrophe year, the sector could move into unprofitable underwriting territories.

"The big winners would be those that have taken action earlier to improve their profitability outside the catastrophe space and reduce their exposure to the sort of high-frequency, high-probability events that recur every 10 years or so (one-in-10 year risks).

“If pricing continues to deteriorate across all lines and loss experiences revert to a more normal level, players that have mainly addressed the risk from a solvency perspective and are overexposing their earnings, could see their competitive position deteriorate."