Reinsurer appetite for nat cat to rise: S&P

S&P says reinsurers are showing growing appetite for nat cat risk as market conditions move in their favour and expects them to deploy more capital over the next two years, albeit within strict limits.

In a new report, the rating agency says rising demand, improved pricing and more favourable terms and conditions boosted reinsurers’ appetite for property catastrophe risk during 2023, with most of the top 19 global carriers increasing their exposure during January 2024 renewals.

“We observed an average overall increase in risk exposure of 14%, although a smaller group of reinsurers continued to reduce theirs. Favourable reinsurance pricing and improving net investment income in 2023 and 2024 have presented reinsurers with opportunities to deploy capital and expand their property catastrophe business,” says S&P.

It believes improved underwriting margins and sound investment returns, coupled with robust capitalisation, are expected to increase reinsurers’ already strong buffers against exceptional shocks and see them “seize the opportunity” to further invest in nat cat risk going forward.

“While demand from cedents for natural catastrophe cover remains high, we expect reinsurers to remain optimistic regarding pricing conditions. While rates are favourable, the strong returns expected in 2024 could encourage reinsurers to continue deploying capital and expanding their property catastrophe portfolios,” says S&P.

But it remains cautious, noting that if pricing weakens, reinsurers’ appetite for natural catastrophe exposure could “quickly wane”.

“For example, benign conditions in the second half of 2024 could increase pressure on reinsurers to alter terms and conditions or lower rates. We anticipate that this would prompt them to hold back and maintain a disciplined approach,” says S&P.

“We expect reinsurers to remain cautious, even as they expand their exposure. In particular, we anticipate that they will continue to be restrictive on their exposure to higher frequency and midsize events, and reduce quota share and aggregate cover offerings,” it continues.

S&P notes that although insured nat cat losses of more than $100bn last year were above the long-term average, higher attachment points – combined with a pattern of frequent but midsize events in 2023 – meant that a large portion of the losses fell mainly on primary insurers.

Primary insurers bore a larger-than-usual share of the losses stemming from the repeated and severe convective storms (SCS) in the US. Conversely, losses at S&P’s sample group of global reinsurers were “well within” their budgeted natural catastrophe load, says the rating agency.

It adds that insured loses for this year are also tracking above the historical average but, again, are likely to fall on primary players and be within reinsurers’ budgets.

“As in 2023, we expect the nature of the events to cause primary insurers to absorb a higher than usual share of the 2024 losses. As a result, we forecast that property catastrophe business will contribute about 3 percentage points to return on equity (ROE), on average, across the [reinsurer] group if natural catastrophe losses remain within the budget,” it says.