In 2022, the global reinsurers saw another record year of natural catastrophe losses. The estimated insured losses of $125 billion were well above the long-term average expectation for the insurance industry. As a result, catastrophe budget expectations were exceeded for another year for the top 20 global reinsurers.

Despite the growing cost of natural catastrophes, and the apparent divide in strategy observed in recent years, 2023 and 2024 could be a turning point for visible earnings improvements in the space. More reinsurers may aim to grow their catastrophe exposures as pricing continues to improve and demand remains strong. Still, many reinsurers entered 2023 with a cautious stance on property catastrophe risk.

More than half of the top 20 global reinsurers maintained or reduced their natural catastrophe exposures during the January 2023 renewals, despite the improved pricing and terms and conditions. Less than half decided and managed to deploy more capital in January 2023.

For the top 20 global reinsurers, overall conditions have improved this year. Property catastrophe reinsurance pricing and net investment income are improving, while net exposure for a 1-in-250-year return period remained unchanged.

Financial market volatility, inflation, and increasing climate variability are large risks for the industry. However, global reinsurers' very strong capital adequacy and improved margin cushion them against exceptional shocks--such as from natural catastrophe events. If a severe 1-in-100-year event hits, causing unprecedented annual losses exceeding $250 billion across the entire insurance industry, we expect the reinsurance sector on aggregate would be capitalized just slightly below the 'AA' confidence level.

Contribution To ROE Will Improve If Losses Remain Within Budget

For 2023, we expect the property catastrophe business to contribute about 2.5 percentage points to return on equity (ROE) for the top 20 if natural catastrophe losses remain within the reinsurers' annual budget. Insured losses so far are tracking above the historical average following severe convective storm losses in the U.S., the earthquake in Turkey, the cyclone and flood events in New Zealand, floods in Southern and Eastern Europe, wildfires in Hawaii and Southern Europe, and Hurricane Hilary in Mexico and the U.S. For example, Munich Re reported global natural catastrophe insured losses of $43 billion for the first six months of 2023, compared with a 10-year average of $34 billion. However, we think that primary insurers in 2023 will absorb a higher share of these losses compared with prior years, thereby having less effect on the top 20 global reinsurers' budgets.

The contribution to overall ROE was only marginal for the top 20 global reinsurers over 2017-2022 based on our estimates, showing that the property catastrophe business underperformed in the period. In those six years, losses were at or above budget for the group (see chart 1) supporting the need for price corrections. We estimate that the top 20 aggregate ROE would have been on average about 2 percentage points higher every year since 2017 had catastrophe losses been in line with budget expectations (see chart 2). In terms of combined (loss and expense) ratio, the top 20 aggregate incurred about 9.5 points of natural catastrophe losses annually over the past six years--about 2.5 points more than budget expectations.

Chart 1

Chart 2

Catastrophe Budgets Keep Up With Increased Costs

2022 was the fourth-costliest year on record for annual global insured catastrophe losses, with Hurricane Ian causing the second-largest insured losses in history. The top 20 global reinsurers now budget about $17.1 billion for natural catastrophe losses in 2023 (versus $15.5 billion in 2022 and $13 billion in 2021).

Table 1

We think that many reinsurers, in addition to allowing for exposure growth and inflation, are continuing to factor a greater climate variability into their forecasts this year. At the same time, elevated losses from midsize perils (such as floods, convective storms, and wildfires) are contributing to the long-term trend of rising insured losses from natural perils.

This increased budget would broadly translate into an annual insured loss for the whole insurance industry of about $85 billion, which aligns with the historical 10-year average (see table 1).

Loss Shares Reduce As Primary Insurers Retained More Risk In 2022

We expect reinsurers will continue to limit their appetite for frequency risk and exposure to midsize events while still reducing quota share and aggregate cover offering. At the same time, we expect attachment points will continue to increase to mitigate increasing inflation and cost trends. Over the past three years, this led to loss share declining for the top 20 global reinsurers, which fell below our long-term estimate of 20% (chart 3).

Similar to 2021, in 2022, the frequency of losses and occurrence of only one very large event coupled with the higher attachment points has meant that pure primary insurers supported a significant amount of the losses.

Chart 3

Rising Underwriting Margins And Improved Investment Returns Will Provide More Buffer In 2023

Assuming losses remain in line with catastrophe budgets, we forecast that the group will post improved pretax profits of about $30 billion in 2023 (versus $22 billion expected in 2022) because both underwriting and investment margins are set to increase. In a severe stress scenario, this implies a buffer of about $47 billion (natural catastrophe budgets of $17.1 billion plus forecast pretax profits of $30 billion) before capital depletion. That also assumes companies take none of the actions we would typically observe in a stress scenario, such as suspending share buybacks or other shareholder returns, and that investment performance remains in line with our base-case assumptions (see chart 4).

We expect the capital adequacy of the top 20 reinsurers would be resilient to a repeat of 2017, which saw the highest loss recorded by the industry in a single year (between $150 billion and $175 billion) and that we estimate to be well below a 1-in-50 stress scenario.

Chart 4

We observe similar levels of resiliency at individual reinsurers. Based on their average share of market losses over the past five years, pretax profits should provide material cushion against sizable insured industry losses (see chart 5).

Chart 5

Capital levels and risk appetite for individual reinsurers vary. We expect 15 reinsurers to sustain their S&P Global Ratings capital adequacy, if aggregate losses are at the 1-in-50-year level in 2023. That said, such a scenario could lead five reinsurers to experience a deterioration in their S&P Global Ratings capital adequacy, unless they take action to manage their capital levels (see chart 6).

Chart 6

Contrasting Strategies Continue

Of the top 20 global reinsurers, we saw a majority stabilizing or contracting their natural catastrophe exposures in January 2023. With market volatility and uncertainty through 2022 marked by a rapid rise in interest rates and the Russia-Ukraine conflict, we saw limited availability of capital to be deployed. At the same time, we think that many reinsurers focused on maintaining a reasonable level of volatility on their balance sheet, so they could benefit from better returns without taking on more risk. The average contraction was 7% for those reinsurers that opted to reduce absolute net exposure to a 1-in-250-year aggregate loss.

Chart 7

By contrast, other reinsurers already started to put more capital at risk in January 2023 and increased absolute net exposure by about 14% on average.

As a result of these changes, we estimate that average capital at risk has remained almost unchanged across the top 20 group of reinsurers. On average, S&P Global Ratings total adjusted capital (TAC) exposed in January 2023 stood at 25%, compared with 24% one year before.

Chart 8

Retrocession Use Will Likely Reduce Amid Higher Pricing

Capacity for retrocession, including use of third-party capital, has been somewhat constrained as of January 2023, with continuing hardening pricing conditions. Data at Jan. 1, 2023, suggest that reinsurers have tended to reduce their use of retrocession for tail risk in 2023 as a result. We expect that rates in the retrocession market will continue to increase. This means reinsurers may have to cede proportionally less of the risk if it becomes too expensive. We think those reinsurers that will aim to deploy more capital in 2023 and 2024 may decide to rely less on retrocession.

That said, the top 20 reinsurers remain large users of retrocession, and it will remain a key risk management tool. As of Jan. 1, 2023, reinsurers ceded slightly over half of their 1-in-250 exposure, on a simple average basis. However, average utilization ratios mask a wide range of coverage. Large global reinsurers typically retrocede less risk, for example (see chart 9).

Chart 9

An Average Second-Half 2023 Will Mean More Capital Is Deployed In 2024

As demand continues to rise with cedents experiencing increased volatility, the global reinsurance sector is more optimistic because it enjoys improved and more certain pricing conditions. With strong returns expected in 2023, reinsurers that have been cautious during the recent turbulent times may seize the opportunity to deploy more capital and grow their property catastrophe book.

An active second half of 2023, coupled with additional inflationary pressure, may nonetheless slow appetite for many to further grow their exposures to natural catastrophes.

Table 2

Related Research

• Insurers' Losses From The Tragic Maui Wildfire Are Expected To Be Manageable, Aug. 17, 2023
• Top 20 Global Reinsurers Can Ride Out Unrealized Losses, Aug. 17, 2023