Some global reinsurers have chosen to stop retrenching from catastrophe risks, deciding instead to take advantage of higher premium rates and increase their exposure, according to S&P Global Ratings.

Although risk discipline is likely to prevail, global reinsurers’ greater exposure to catastrophe risk could heighten their earnings and capital volatility, S&P said in its report titled “Global Reinsurers Aim to Rebalance Their Natural Catastrophe Exposure.”

Global reinsurers’ continue to have very strong capital adequacy, which is providing them with a cushion against catastrophe exposures, despite the fact that insured nat cat losses were the highest on record in 2017 and the fourth highest on record in 2018, said S&P citing statistics from Swiss Re’s sigma research.

Nevertheless, the report added, losses from natural catastrophes wiped out earnings for five of the top-20 reinsurers in 2018.

“The magnitude of the 2018 losses – about 50% higher than reinsurers would expect in an average year – also helped push up prices at the 2019 April and June/July renewals,” the report said, noting that property catastrophe rates increased by 15%-25% on loss-affected accounts.

Reinsurers’ reaction to the price upturn has varied. For example, most of the top-20 reinsurers chose to increase their exposure relative to capital in order to benefit from improved rates. However, “a few stuck with defensive measures, allowing their exposure to contract further,” similar to their strategy in 2018, the report said.

On average, S&P said, reinsurers’ property-catastrophe risk appetite for a 1-in-250-year return period event rose to 29% of shareholders’ equity exposed in January 2019, compared with 27% in January 2018.

At the same time, some reinsurers chose to cut their exposures to extreme events by more than 5 percentage points.

“Although indications that reinsurers are relaxing their underwriting discipline remain weak, reinsurers will face difficult strategic decisions if the cycle starts to turn,” S&P indicated. “Overexposure risks their balance sheet and earnings, but underexposure will cause them to miss out on the higher returns that the property catastrophe space might offer. Reinsurers will need to find the right balance.”

Retrocession Retains Vital Role

Meanwhile, the growth of alternative capital seems to have paused, at least temporarily, the report said, noting, however, that this has not materially shifted reinsurers’ retrocession strategies.

Although the retrocession market has seen price hardening with significant rate increases, its use by primary reinsurers has been flat, the report said.

“As of Jan. 1, 2019, insurers were choosing to reinsure about half of their 1-in-250 exposure, on average,” S&P said. Further rate hardening could lead global reinsurers to gradually cede less of their exposure to the retrocession market.

Earnings Volatility Could Rise

“Although global reinsurers have maintained their underwriting discipline, we expect earnings volatility could be higher than historically observed, where exposure has increased,” the report said.

While natural catastrophe losses were 50% above reinsurers’ budgeted level, S&P said, they were slightly below the insurance industry’s modeled annual loss expectation of $86 billion reported by AIR Worldwide, the Boston-based modeling company.

“The sector remains resilient to extreme events, but we expect a larger industry loss would hit more reinsurers,” S&P said. “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…”

Creeping 2018 Catastrophe Losses

Claims following Typhoon Jebi, which was 2018’s costliest event, “have seen significant unfavorable developments in 2019, which have affected reinsurers’ earnings for this year,” the report went on to say.

By year-end 2018, claims from Jebi totaled $6 billion but had risen to about $15 billion by the first half of 2019, making it the most costly Japanese typhoon on record for insurers.

Typhoon Jebi is a reminder of the uncertainties associated with early loss estimates, the report said. While initial loss estimates for some large events in 2017, such as Hurricane Harvey, were conservative, other claims developed negatively, as those from Hurricane Irma, the report said.

“If the industry were to experience a mega event, beyond $50 billion loss, the risk and uncertainty stemming from substantial loss creep could be significant,” which is a risk the industry should better prepare for, the report affirmed.

*This story ran previously in our sister publication Insurance Journal.