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S&P Ratings: Reinsurers face tough decision on cat risks if prices keep rising


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S&P Ratings: Reinsurers face tough decision on cat risks if prices keep rising

Reinsurers will face "difficult strategic decisions" about their property-catastrophe exposures if prices for those risks continue to rise, according to a report from S&P Global Ratings.

The rating agency said the top 20 reinsurers' responses to rising property-catastrophe prices is already diverging as they grapple with whether to increase their exposure to capitalize on the higher rates, or be more defensive and cut back.

More than half of the top 20 companies are now more exposed to property-catastrophe risk than they were last year, and the average exposure of the 20 firms to 1-in-250-year events is now 29% of shareholders' equity compared with 27% in January 2017, S&P said. This is partly because of exposure growth and partly because of capital deterioration.

Ratings said price increases had prompted about half of the top 20 to increase their absolute net exposure to a 1-in-250-year aggregate loss by more than 10 percentage points. It noted that while it expected reinsurers' discipline when taking risks to prevail, greater exposure to catastrophe risk could increase earnings and capital volatility.

But the report also shows that four reinsurers cut their exposure to extreme events, and that three of these reduced their exposure by more than 5 percentage points.

If reinsurance prices continue to rise, Ratings said the temptation to expand catastrophe exposures will grow. But it noted that overexposure puts companies' capital and earnings at risk, while under-exposure means companies might miss out on higher returns. "Reinsurers will need to find the right balance," the report said.

Continuing rate rises could also increase reinsurers' exposure in other ways. The prices reinsurance pay for retrocession coverage, which they buy to manage their exposures, have seen "significant" increases, according to Ratings, and added that further increases "could lead global reinsurers to gradually cede less of their exposure in the future."

Capital buffer

S&P Ratings said the biggest reinsurers' capital bases are well-protected for normal catastrophe loss years. The agency estimated that the top 20 reinsurers collectively have a $33 billion buffer before losses started to eat into capital in a severe loss scenario, assuming no dividends or other payouts to shareholders. The buffer is made up of $22 billion of estimated 2019 profit before tax and the companies' $11 billion budget for natural catastrophes.

The earnings and catastrophe budget buffer at most reinsurers would be sufficient to withstand a 1-in-30 to 1-in-40-year loss, which would equate to an industry aggregate loss of $150 billion, Ratings said. Man-made and natural catastrophes cost the industry $150 billion in 2017, and $85 billion in 2018, according to Swiss Re figures. Both were above the 10-year annual average of $71 billion.

A 1-in-100-year loss would cause eight of the top 20 reinsurers' capital adequacy, as measured by S&P Ratings, to deteriorate unless they took action to manage capital levels. A 1-in-250-year event would cause 14 reinsurers' capital adequacy to drop.

Hurricane forecasters at Colorado State University predict a "near normal" Atlantic hurricane season — often a big source of reinsurers' losses. The forecasters expect 14 named storms, of which seven will be hurricanes and two "major hurricanes" in 2019.