Global reinsurers increase natural catastrophe exposure by 14%

In 2023, global insured losses from natural catastrophes reached $108b.

Global reinsurers are increasingly embracing natural catastrophe risks, driven by improved pricing, rising demand, and more favourable terms. In 2023, the top 19 global reinsurers saw a 14% average increase in exposure to these risks, capitalising on the opportunities presented by the reinsurance market's hardening conditions, reported S&P Global Ratings.

Despite the rising costs associated with natural catastrophes, reinsurers' strategies have varied. Whilst some have increased their exposure, a smaller group has opted to reduce theirs. 

The divergence comes as reinsurers navigate the higher frequency of mid-sized events, such as severe convective storms in the US, which have resulted in primary insurers shouldering a larger share of losses.

In 2023, global insured losses from natural catastrophes reached $108b, according to the Swiss Re Institute, surpassing the long-term industry average. However, the losses incurred by the largest global reinsurers remained within budget, reflecting their cautious approach to risk management. 

This approach is expected to continue, with reinsurers likely to remain selective in their exposure to higher-frequency events.

The reinsurers' capital adequacy remains strong, with improved underwriting margins and sound investment returns contributing to robust buffers against potential shocks. 

S&P Global Ratings estimates that the sector could absorb an industry-wide loss event of up to $250b, occurring once every 100 years, without significant capital depletion.

For 2024, insured losses are expected to remain high, with Munich Re reporting global natural catastrophe insured losses of $62 billion in the first half of the year alone. 

Nevertheless, the top 19 reinsurers have budgeted for $19.2b in natural catastrophe losses, up from $17.1b in 2023. This budget increase reflects the ongoing rise in natural catastrophe costs and the sector's readiness to handle such events.

Investment returns are expected to play a crucial role in strengthening reinsurers' financial positions. Combined pretax profits across the sample group are forecasted to reach $45b in 2024, a significant increase from the $30b reported in 2023. 

This increase is contingent on catastrophe losses remaining within budget and investment margins meeting base-case assumptions.

Despite the favourable conditions, reinsurers remain cautious about expanding their exposure further. 

The high cost of retrocession, driven by tightening market conditions, has led some reinsurers to scale back their use of this risk transfer mechanism. As a result, reinsurers may be forced to retain a higher share of risk if retrocession prices remain elevated.