Global reinsurers’ earning volatility will intensify if annual Nat CAT claims keep moving toward levels that are closer to the long-term average, said S&P Global Ratings in a new report.
Reinsurers are twice as likely to report an underwriting loss due to natural disaster as they were in 2012, according to the report, “Global Reinsurers’ Earnings Volatility to Increase as Exposure to Natural Catastrophe Risk Remains Largely Unchanged”.
Global reinsurers saw losses from natural disasters rise to $54 billion in 2016 from the relatively low levels of $36 billion in 2015.
“Global reinsurers’ exposure to unpredictable and high-severity natural catastrophe events is a major driver of reinsurers’ earnings and capital volatility, and while we are seeing capital at risk reduce slightly as a percentage of equity, earnings exposure is up,” said S&P’s Analyst Charles-Marie Delpuech.
In analysing global reinsurers’ CAT risk exposure in 2017, the agency observes that the sector’s extremely strong capital adequacy continues to provide some cushioning to the industry, but also that some reinsurers are more exposed and sensitive to the risk than others. '
S&P considers that seven out of the 20 reinsurers it rates might experience erosion of their capital base due to an annual aggregate loss in the 1-in-10-year return period range in 2017, while in 2016, it did not project any to be at threat.
“Given that prices are continuing to soften across all lines of business and global property catastrophe prices were down about 4%-6% during 2017 renewals, we consider more-frequent CAT losses will become a bigger threat to underwriting profits and capital than they were in the past,” said Mr Delpuech.
“Reinsurers are therefore likely to see heighten volatility in earnings, in our view.” Those more exposed might have to rethink their appetite for property catastrophe risk in order to sustain their earnings and capital base, as well as defend their competitive positions. M