The natural catastrophe business of global reinsurers has been reshaped by five years of higher-than-expected losses, which is leading reinsurers to adopt divergent strategies—either diving in to write more business at higher premiums or reducing their exposure, according to S&P Global Ratings.

Only half of the top 21 global reinsurers increased their natural catastrophe exposures in 2022, while the other half are taking a more cautious and defensive approach by reducing exposures, said S&P in a report titled, “Global Reinsurers Part Ways on Natural Catastrophe Risk—Even as Prices Rise,” published earlier this week.

“We saw a large reduction in natural catastrophe exposure in January 2022 for about half of top 21 reinsurers, after they reassessed their risk exposures in certain markets and geographies. We believe this is explained by uneven pricing adequacy across the globe, despite years of improved pricing,” S&P explained.

“The average contraction was 20 percent for those reinsurers that opted to reduce absolute net exposure to a 1-in-250-year aggregate loss,” the report continued. “To us, this suggests a clear, strategic derisking.”

On the other hand, the other half of the top 21 group of reinsurers opted to increase their absolute net exposure by close to 20 percent on average, S&P said.

According to the report, the cost of natural catastrophes has topped loss expectations during the past five years, even though reinsurers have continued to raise their aggregate catastrophe budgets. This year, the top 21 on average increased budgeted catastrophe loss expectations by almost 20 percent to $15.5 billion in 2022 (compared with $13 billion in 2021), said S&P, suggesting that many reinsurers are not only allowing for exposure growth, but they are also factoring greater climate variability into their forecasts.

If natural catastrophe insured losses remain in line with budgets this year, S&P predicts that the top 21 reinsurers will post pretax profits of about $22.5 billion in 2022, which could add up to 2.5 percentage points to the sector’s return on equity.

This nat cat loss budget (of $15.5 billion) for the top 21 reinsurers broadly translates into an annual insured loss for the whole industry of approximately $75 billion, which aligns with the historical 10-year average, said S&P.

S&P predicts that reinsurers will continue to limit their appetite for frequency risk and exposure to mid-sized events, leading them to reduce quota share and aggregate cover offerings. Reinsurers may, however, be tempted to further deploy capital into the property catastrophe line of business if 2022 turns out to be within budget, as demand continues to rise, S&P said.

“Reinsurers that have been more cautious during the recent turbulent times may decide to follow a more opportunistic trend. On the other hand, an active second half of 2022, coupled with additional inflationary pressure, would call into question the strategy of those reinsurers that have maintained or increased exposure to natural catastrophes,” the report cautioned.

While rapid increases in interest rates, volatile financial markets, inflation, and growing climate variability are large risks affecting global reinsurers, S&P noted that their “very strong capital adequacy continues to cushion them against exceptional shocks–such as from natural catastrophe events.”

Even with a severe 1-in-100-year event that causes annual losses in excess of $250 billion across the entire insurance industry, 14 of the top 21 global reinsurers would maintain a buffer at their current S&P Global Ratings capital adequacy level.

A version of this article was originally published on the Insurance Journal website.