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Property catastrophe profitability on knife edge amid inflation and mid-sized losses

S&P says the top 21 reinsurers now budget about $15.5bn for natural catastrophe losses in 2022, broadly translating into an annual insured loss for the whole industry of about $75bn

The natural catastrophe business of global reinsurers has been reshaped by five years of higher-than-anticipated losses. But if insured losses remain within budget, the class of business could add up to 2.5 percentage points to the sector’s return on equity in 2022, analysts say

Reinsurers can still make money out of property catastrophe business, with analysts estimating the class will add around 2.5 points to the top writers’ returns on equity (RoE) this year, providing losses are within budget.

But S&P Global analysts warned it remains to be seen whether losses fall within budget given exposure growth, inflation and elevated losses from mid-size perils such as flood and wildfire are “contributing to the long-term trend of rising insured losses from natural perils”.

The top 21 reinsurers now budget about $15.5bn for natural catastrophe losses in 2022 (versus $13bn in 2021), according to S&P. This budget would broadly translate into an annual insured loss for the whole industry of about $75bn.

“It appears reinsurers will fully use their insured loss budget in 2022, according to our half-year estimate of $35bn to $40bn (based on Munich Re, Aon and Swiss Re),” the S&P analysts said.

Property catastrophe business has performed poorly in recent years. The top 21 global reinsurers saw only a “marginal” profit contribution from natural catastrophe business during the 2017 to 2021 period, where losses were at or above budget for the group.

Last year was the fourth-costliest year on record for annual global insured losses, with Hurricane Ida one of the largest insured losses in US history, Uri the biggest US winter storm in history and Storm Bernd leading to the largest European flood on record.

This led to a large reduction in natural catastrophe exposure at January 2022 for about half of the top 21 reinsurers, after they reassessed their risk exposures in certain markets and geographies.

The average contraction was 20% for reinsurers that opted to reduce absolute net exposure to a one-in-250-year aggregate loss, the rating agency said. By contrast, the other half increased absolute net exposure by close to 20% on average.

But rising prices mean reinsurers are “more optimistic” about market conditions ahead of the forthcoming renewals, S&P said.

The analysts added: “The temptation may increase in 2023 to further deploy capital into the property catastrophe line business as demand continues to rise.”

“On the other hand, an active second half of 2022, coupled with additional inflationary pressure, would call into question the strategy of those reinsurers that have maintained or increased exposure to natural catastrophes.”

Reinsurers are also expected to continue to limit their appetite for frequency risk and exposure to mid-size events and to reduce their quota-share and aggregate cover offering.

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