S&P Warns of Reinsurer Protections as Catastrophe Risks Escalate

As natural catastrophes become more frequent and destructive, a key backstop intended to help cover losses has gotten harder to access.

The reinsurance industry, which exists to help primary insurers cope with losses when disaster hits, has taken significant steps to shield itself against the financial fallout of storms, floods and other severe weather events, according to S&P Global Ratings.

Over the past half decade, the top 19 global reinsurers have more than halved their exposure to insured catastrophe losses, and will likely continue to bear a smaller burden than they have historically, according to Simon Ashworth, chief analytical officer for insurance ratings at S&P.

“I don’t expect the pendulum to swing back anytime soon,” he said in an interview.

The industry has built considerable buffers after years of dodging losses and accumulating capital via investments. Big reinsurers now have enough capital to handle insured losses equivalent to three Hurricane Katrinas in a single year, or roughly $300 billion, while maintaining their existing credit ratings, according to S&P.

“That is remarkable,” Ashworth said.

This year, natural catastrophes are set to drive insured losses past $150 billion, which is well above the 10-year-average, according to risk modeler Verisk. With primary insurers struggling under the weight of the costs they now face, reinsurers are under mounting pressure to lower their prices and expand their coverage.

S&P sees a “moderate decline in rates” from reinsurers that Ashworth says “will help alleviate some of the pressure on primary insurers.” But overall, the industry looks set to “hold firm on terms and conditions,” he said.

The reinsurance industry covered just over 10% of total insured catastrophe losses last year, compared with about 25% in 2019 and well below the historical average of 20%, according to S&P.

“Many reinsurers are increasingly selective, emphasizing profitability over growth, and refusing business that doesn’t meet tightened risk-return thresholds,” Fitch Ratings said in a recent report. “Especially in US property and casualty lines.”

This week, reinsurers are meeting in Monte Carlo for an annual get-together during which executives discuss how to approach evolving trends. These include expectations among the primary insurers who make up their client base that reinsurers will cut their prices, according to Moody’s Ratings.

In an emailed statement on Monday, Hannover Re said it anticipates a “continued attractive market environment” making the firm “well positioned for further profitable growth.” At the same time, the German reinsurer noted that competition has increased, and added that it’s prepared to “strategically expand its exposure to natural catastrophe covers over time.”

A survey conducted by Moody’s of reinsurance buyers shows that three-quarters expect property reinsurance prices to decline, with some looking for cuts as deep as 7.5% next year.

Moody’s also notes that in the longer term, severe weather will pose a “key challenge for the reinsurance sector” as natural catastrophes grow more frequent. In the 1970s, there were almost 50 extreme weather events annually; in the past decade, there were closer to 200, Moody’s says.

Reinsurers also face bigger losses in the form of so-called secondary perils, such as severe convective storms and wildfires, Moody’s said. And figuring out how to model such events is proving challenging for buyers and sellers of insurance-linked securities such as catastrophe bonds.

“The challenge with secondary perils is that they tend to be slightly harder to model and as a consequence to price for,” said Eveline Takken-Somers, head of insurance-linked investments at PGGM, a Dutch pension investor overseeing €7.5 billion ($8.8. billion) in insurance-linked assets. “It’s important the models are updated.”

For now, reinsurers have cut their exposure to secondary perils by raising the loss level at which a policies pay out, know as attachment points.

The industry budgeted for a total of $21 billion to deal with catastrophe losses in 2025, of which reinsurers have so far used only half. By comparison, major US primary insurers have already used up 80% of their budget, in large part due to the hit they took after the wildfires in California, according to Ashworth.

Photograph: A military truck drives down a flooded Canal Street following Hurricane Katrina’s landfall in New Orleans on Aug. 31, 2005. Photo credit: Mark Wilson/Getty Images

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