S&P warns on reinsurers’ increasing earnings volatility due to nat cats

Global reinsurers' earning volatility will intensify if annual natural catastrophe claims keep moving toward levels that are closer to the long-term average, S&P Global Ratings said on Aug. 14.

"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.

Global reinsurer saw losses from natural disasters rise materially in 2016 to $54 billion from the relatively low levels of $36 billion in 2015.

In analysing global reinsurers' catastrophe risk exposure in 2017, S&P observed 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. S&P now consider 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, the ratings agency 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 to 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 heightened 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."

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