Primary insurers bear more risk in new reinsurance climate

NatCat losses in the first half of 2024 were driven by medium-sized events.

Global reinsurers are seen to maintain strict terms and conditions to limit exposure to secondary peril events, as weather-related losses become more significant and volatile due to climate change, according to Fitch Ratings.

The tightening of natural catastrophe cover terms is expected to benefit reinsurers' risk profiles and profitability in the long term, with no immediate reversal anticipated, even if market conditions shift. 

Whilst primary insurers are now retaining more risk for secondary peril events, reinsurers still provide ample coverage for the most severe catastrophes.

Natural catastrophe losses in the first half of 2024 were driven by medium-sized events, such as convective storms in the US. 

Reinsurers' measures to reduce exposure meant that these losses were primarily absorbed by primary insurers. Higher attachment points and lower aggregate covers limited the trigger of reinsurance payments.

The reinsurance sector has seen strong profitability due to steep property catastrophe price increases in recent years. 

Although prices are expected to ease moderately, reinsurers are likely to continue imposing tight limits on lower layers of natural catastrophe protection, avoiding large aggregate covers, and maintaining underwriting discipline. 

The cautious approach is reinforced by limited new market capacity and the increasing risks posed by climate change and property exposure growth.

Fitch's monitored group of 19 non-life reinsurers reported strong underwriting profitability in the first half of 2024, with a combined ratio of 84.2%, compared to 85.9% in the same period of 2023. Natural catastrophe losses contributed 5.9 percentage points to this ratio.

Leading European reinsurers—Hannover Re, Munich Re, SCOR, and Swiss Re—reported particularly strong earnings. 

Their average combined ratio for property and casualty reinsurance improved to 84.2%, from 86% the previous year, reflecting the benefit of rate increases, stricter terms, and fewer large losses.