Reinsurance industry shies away from calamity coverage: Fitch Ratings

Underwriting discipline to continue in 2024 but price-hikes will be moderate.

Global reinsurers are reducing coverage for medium-sized natural catastrophe risks due to pressure from investors, according to Fitch Ratings.

After experiencing years of significant catastrophe losses and improved profitability in other market segments, even the strongest reinsurers are now tightening their terms and conditions to limit aggregate covers and lower layers of natural catastrophe protection. 

This reduction in coverage leaves primary insurers less safeguarded against secondary peril events, but reinsurers still offer substantial coverage against the most severe events. The reinsurance market seems to have shifted from providing earnings protection to primarily offering capital protection for cedents.

In recent years, natural catastrophe business has become less profitable due to inadequate price increases in the face of more frequent, severe, and volatile weather-related losses linked to climate change. This has diminished reinsurers' appetite for natural catastrophe coverage, especially as other business lines are experiencing price rises that outpace claims inflation. 

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The structural improvement of tighter terms and conditions for natural catastrophe coverage is expected to benefit reinsurers' risk profiles in the medium term, with little likelihood of quick reversals even if market conditions change.

Despite insured natural catastrophe costs reaching $53b globally in the first half of 2023, 47% above the 20-year average, non-life reinsurers have reported strong underwriting profitability. 

This is reflected in the aggregate reinsurance combined ratio of 88% for the first half of 2023, driven by above-claims-inflation price increases and a lower natural catastrophe burden as cedents retained more of the losses themselves. 

Reinsurance pricing momentum persisted during the June and July renewals, with notable price rises for US property-catastrophe markets.

Fitch Ratings anticipates reinsurers to maintain strong underwriting discipline, despite higher interest rates, and expects the reinsurance market hardening trend to continue into 2024. 

However, price increases are likely to be more moderate compared to 2023, as multiple rounds of hardening since 2018 have generally achieved rate adequacy.