As the Earth warms and more natural disasters occur, insurers are finding it increasingly difficult.

In 2023, global insured catastrophe losses exceeded $100 billion for the fourth year in a row. The trend continues this year: In the first half, losses reached $62 billion, well above the 10-year average of $37 billion, according to a recent analysis by Munich Re.

Normally this shouldn’t be a problem for primary insurers, who can offset some of that risk by buying reinsurance. But it’s becoming increasingly difficult for them to do so. In a world of climate change, inflation and growing exposure to real estate, reinsurers have been raising their prices and demanding more favourable terms, such as raising the level at which a policy pays out.

And that means that the primary insurers are left holding the bag.

“Insurers are being forced to take on more risk,” said Charles-Marie Delpuech, an insurance credit analyst at S&P Ratings. “It’s a structural change in the overall market.”

And the numbers show how much better reinsurers are doing as a result. S&P data on the 19 largest reinsurers globally shows that their annual share of natural catastrophe losses has historically been around 20%, but that this has fallen sharply over the past three years, falling to around 10% by 2023.

The main reason is that the reinsurance industry has become increasingly reluctant to support “secondary perils,” which are smaller but more frequent extreme weather events such as tornadoes, thunderstorms, fires and floods. These local events are harder for the insurance industry to model and manage, in part because they are driven by climate change.

They are also responsible for a growing share of insured losses. According to an estimate by insurance broker Aon Plc, severe convective storms alone accounted for about $70 billion in insured losses worldwide last year. That is 59% of losses from all natural catastrophes.

According to Delpuech, reinsurers faced losses from secondary perils in 2021 and 2022 but have since reduced their exposure.

In 2023, “a large portion of losses were primarily on primary insurers,” particularly in the U.S., where most severe convective storms occur, S&P said. Conversely, reinsurance losses were “well within their budgeted natural catastrophe burden.”

Delpuech points out that even if a once-in-100-year natural disaster were to occur and the industry suffered more than $250 billion in annual losses, most reinsurers would still be protected.

“We calculate that the sector as a whole would still be capitalized above the 99.99% confidence level after such an event,” S&P said.

The bottom line is that reinsurers appear to be particularly well positioned to withstand both primary perils, such as a major hurricane, and secondary perils to which they are less exposed.

Now that reinsurers feel they have found their feet, they are emboldened to expand their businesses, but on their own terms. This means higher prices and stricter clauses for when a policy is activated.

Moody’s Ratings said it has become more optimistic about reinsurers. On Tuesday, the firm raised its outlook for the global reinsurance sector to “positive” from “stable,” citing several factors including higher premiums, tighter policy conditions and lower secondary peril exposure.

Based on January renewals, the top 19 reinsurers increased their average overall natural catastrophe risk exposure by 14%, S&P said. Their combined budget for absorbing “nat-cat” losses also rose to about $19.2 billion in 2024, from $17.1 billion in 2023 and $15.5 billion in 2022.

Global reinsurers are expected to deploy more capital over the next two years, S&P said. The sector earned its cost of capital for the first time in four years in 2023, and will likely do so again in 2024 and 2025, “reinforcing our stable view on the sector.”

Copyright 2024 Bloomberg.

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