S&P: Global reinsurers to deploy more capital to nat cat amid strong expected returns

S&P Global Ratings expects global reinsurers to “seize the opportunity” to deploy more capital to nat cat risk over the next two years – albeit within strict limits – after most of the top 19 players took on more exposure in 2023 and 2024 following the market shift on pricing, terms and conditions.

The firm also forecast combined pre-tax profits to increase 50 percent from $30bn last year to $45bn in 2024 for the group, based on investment margins in line with its current base-case assumptions, and cat losses within the $19.2bn budgeted for the global reinsurers in its sample.

In a report issued in the week before the industry’s biggest reinsurance meeting in Monte Carlo, the agency observed that rising demand, improved pricing and more favourable terms and conditions boosted the appetite of reinsurers for property cat risk during 2023.

Most reinsurers increased their exposure to nat cats during the 1 January 2024 renewal season – in contrast to the divergence in appetite seen in previous years – with S&P Global Ratings highlighting a 14 percent increase in risk exposure on average, although a smaller group continued to reduce theirs.

“We expect global reinsurers to seize the opportunity to deploy more capital over the next two years, within strict limits,” said the report.

“Improved underwriting margins and sound investment returns, coupled with robust capitalisation, are expected to add to reinsurers' already strong buffers against exceptional shock,” it continued.

And it suggested that based on budgeted property cat losses at the top 19 global reinsurers, the return on equity could benefit by 3 percentage points from this line of business in 2024.

The agency did add, however, that if pricing weakens, the appetite of reinsurers to increase their nat cat exposure “could quickly wane”.

“For example, benign conditions in the second half of 2024 could increase pressure on reinsurers to alter terms and conditions or lower rates. We anticipate that this would prompt them to hold back and maintain a disciplined approach,” the report said.

Higher retentions

The agency highlighted the impact of higher retentions on cat programs, which has meant that despite the last year-and-a-half being active for nat cat losses, the frequency of mid-sized events has put the burden largely on primary insurers, especially from severe convective storms (SCS).

In contrast, losses of global reinsurers fell well within their budgeted nat cat loads in 2023.

The report also noted the “robust capital adequacy” and improved margin at reinsurers which cushions them against outsize shocks such as natural catastrophes.

“On aggregate, we consider the reinsurance sector's capitalisation unlikely to be dented by an event so severe that it would be expected to occur only once in 100 years and would cause annual industry-wide losses exceeding $250bn. We calculate that the sector as a whole would still be capitalised above the 99.99 percent confidence level after such an event,” said S&P.

The agency stated that much-needed price corrections in response to at- or above-budget property cat losses between 2017 and 2022 had made the business line a major contributor to the reinsurance industry’s strong results in 2023, a year when they had a lower loss experience.

And it added that while 2024 insured losses are tracking above the historical average, they are within budget for reinsurers, with a greater proportion than usual retained by primary carriers.

At the same time, global reinsurers have increased their nat cat budgets to around $19.2bn in 2024, from $17.1bn in 2023 and $15.5bn in 2022.

The budget for this year translates to an industrywide insured loss for 2024 of ~$95bn, in line with the historical 10-year average.

Reinsurers to remain cautious

Despite growing appetite for nat cat exposure, reinsurers are expected to remain cautious, said S&P Global Ratings.

“In particular, we anticipate that they will continue to be restrictive on their exposure to higher-frequency and mid-size events and reduce quota share and aggregate cover offerings. In response to high inflation and rising costs, attachment points will remain high,” it said.

The agency noted that similar moves over the past four years have enabled the group of reinsurers it tracks to cut their loss share below S&P Global Ratings’ long-term estimate of 20 percent.

“The shift was exacerbated over 2021-2023 by the frequency of losses and the occurrence of only mid-size events. Such a pattern, combined with higher attachment points, forced primary insurers to absorb a higher proportion of total insured losses,” the report continued.

S&P Global Ratings also highlighted the improved investment returns at reinsurers, and said that based on its forecast for combined pre-tax profits to increase 50 percent to $45bn this year, the group has a combined buffer of around $64bn before capital depletion would occur in a severe stress scenario.

Capital adequacy at the group of reinsurers would reportedly be resilient if a significant industry loss event took place where losses were comparable with those seen in 2017 – when global insured nat cat losses were estimated at around $175bn.

“Such events would still be much less severe than those in our 1-in-50-year stress scenario. Indeed even under our 1-in-100-year stress scenario, we calculate that surplus capital at the 99.99 percent confidence level would likely remain intact across the global reinsurance sector, even though it would be a significant earnings event for the sector,” it continued.

Scaling back retro

In the report, S&P Global Ratings said that data from the 1 January 2024 in-force book for the group of reinsurers indicated they are “slightly” scaling back their use of retro for tail risk in response to increasing cost.

“Constraints on retrocession capacity, including use of third-party capital, and persistently tightening pricing conditions are likely to keep prices high in the retrocession market. If the high cost of retrocession persists, reinsurers could be forced to retain a higher share of risk.

“That said, reinsurers still rely on retrocession, which is a critical component of their risk management strategies,” said the agency.

It said that while retro approaches vary widely, at 1 January 2024 the 19 reinsurers in its group ceded around half of their 1-in-250 year exposure on a simple average basis, with major global reinsurers often opting to retrocede less risk than their peers.

“At the same time, we observe that alternative capital continues to be a critical source of capacity and has further increased its importance, in particular for large global reinsurers’ retro strategies,” the report added.