For the fifth year in a row, insured losses from natural catastrophes are shaping up to be at or above reinsurers’ budget expectations. But the sector can handle the pressure due to “very strong capital adequacy,” according to a new S&P Global Ratings report.

Charles-Marie Delpuech, an S&P Global Ratings credit analyst, noted the years-long pressures that reinsurers are facing with confident consistency.

“The Top 21 global reinsurers saw exceptional insured losses from COVID-19 of about $20 billion in 2020, Delpuech said in prepared remarks. “In addition, insured losses from natural catastrophes were at or above reinsurers’ budget expectations for the fourth year in a row in 2020 [and] 2021 is shaping up to exceed expectations again.”

Even with those pressures, Delpuech said, half of the top 21 global reinsurers rated by S&P Global Ratings chose to maintain or increase their natural property-catastrophe exposure relative to their capital in 2021. By doing so, the reinsurers are benefiting from firmer pricing conditions in the property catastrophe space, he noted.

Flat, With Some Uncertainty

On average, reinsurers’ property-catastrophe risk appetite at a 1-in-250-year return period was broadly flat, at 27 percent of shareholder equity, but some reinsurers saw reductions of around 5 percentage points. Although global reinsurers have maintained their underwriting discipline, S&P said it expected earnings volatility could be higher than historically observed due to higher exposures.

According to S&P, the sector continues to be resilient to extreme events because of its robust capital. If a never-seen 1-in-100-year event hits, causing losses in excess of $250 billion across the entire insurance industry, S&P said it expected 13 of the Top 21 global reinsurers would maintain a buffer at their current capital adequacy level, as measured by its model.

Alternative capital is likely to remain a reliable and vital avenue to retrocede peak perils, but loss experience over the last few years has boosted the cost. So far, reinsurers’ retrocession strategies have not materially shifted, but they could retain more risks if prices continue to harden.

The full report is “Five Years of Over-Budget Catastrophe Losses Test Global Reinsurers’ Discipline.”

Source: S&P Global Ratings