According to a recent assessment by S&P Global Ratings (S&P), only half of the top 21 global reinsurers have increased their exposure to natural disaster risks, while the other half have adopted a more cautious and defensive attitude by decreasing their exposure.
According to the paper, the disparity in approach is a result of the rising cost of natural disasters, which have exceeded loss projections over the previous five years despite increases in reinsurers’ budgets (the aggregate catastrophe budget will reach $15.5 billion in 2022).
Regarding cautious and defensive reinsurers, the research said, “We saw a significant drop in natural disaster exposure in January 2022 for about half of 21 reinsurers after they evaluated their risk exposures in particular markets and regions.
We think this is due to disparities in pricing appropriateness throughout the world, after years of price reductions.
The average reduction for reinsurers that chose to lower their absolute net exposure to a 1-in-250-year aggregate loss was 20%.
This signals to us an intentional reduction in risk.”
In contrast, the choice of reinsurers to increase their natural disaster risk exposure is noticeable compared to shareholders’ equity, indicating that the decrease in risk exposure for certain reinsurers has significantly outpaced changes in shareholders’ equity.
In light of these developments, the research estimates that the average capital at risk for the top 21 reinsurers has grown.
“In January 2022, total shareholders’ equity exposure averaged 28%, up from 28% the previous year.
Note: Earnings at risk is defined as a modelled 1-in-10-year yearly aggregate net loss against normalised projected earnings before taxes and net disaster claims.
Capital at risk is defined as a projected 1-in-250-year annual aggregate net loss against reported shareholders’ equity, according to S&P’s assessment.
This year, S&P anticipates that underwriting margins will strengthen, providing resilience to the industry.
Increased pre-tax earnings (including catastrophe budget) for more reinsurers – based on their average share of market losses over the preceding five years – might offer a measure of protection against significant insured sector losses.
AM Best published a similar analysis stating that several global reinsurance firms have changed their business mix towards casualty and speciality primary lines in response to higher losses from natural disasters and secondary risks, economic instability, and COVID-19’s effects.