Greater risk of negative underwriting results for reinsurers predicted by S&P

With property catastrophe prices dropping during the 2017 renewals, combined with natural catastrophe losses exceeding US$50 billion last year, global reinsurers are at greater risk of having negative underwriting results and will tend to “shy away” from property catastrophe business, Standard & Poor’s Financial Services LLC suggested in a report released Monday.

“The likelihood that natural catastrophe loss activity will push underwriting results into negative territories is rising,” S&P said in the report, Global Reinsurers’ Earnings Volatility to Increase as Exposure to Natural Catastrophe Risk Remains Largely Unchanged. “Exposure to catastrophe risk is an additional pressure point on profitability, and reinsurers that are overexposed might see deterioration of their competitive position over time.”

In that report, S&P referred to Impact Forecasting LLC’s 2016 Annual Global Climate and Catastrophe Report, released this past January. Impact Forecasting, an Aon plc subsidiary, reported that 315 separate natural catastrophes in 2017 caused insured losses of US$54 billion, above the mean of US$50 billion from 2000 through 2015.

S&P, meanwhile, reported that global property catastrophe prices were down about 4%-6% during 2017 renewals.

“Declining prices in reinsurance lines outside property catastrophe are pressuring global reinsurers’ underlying technical profitability,” S&P added.

In its 2016 Annual Global Climate and Catastrophe Report, Aon Benfield noted that the most expensive natural disasters last year included an earthquake in April in Japan (US$5.5 billion), Hurricane Matthew (US$5 billion), flooding in Central and Western Europe (US$3.4 billion) and the Alberta wildfire in May, which Impact Forecasting pegged at US$2.8 billion. Also in 2016, four severe weather events in the United States resulted in insured losses of more than $1 billion each.

“Global weather mean losses for individual events on an economic loss basis have shown an annual growth rate of 1.4 percent since 1980,” Impact Forecasting said at the time.

Aon’s reinsurance brokerage, Aon Benfield, conducted a mean and median analysis on its own database, using weather events since 1980 that that caused at least US$50 million in economic losses and at least US$25 million in insured losses, adjusting those losses for inflation to 2016 U.S. dollars.

Aon noted the percentage of urbanized population has grown by 0.9% each year, to 53.9%, from 1980 through 2016.

“The UN suggests that by the next census study in 2020, roughly half of the world’s population will live within 100 kilometers of an ocean coastline,” Impact Forecasting said in its report.

“There is growing evidence of how a warming atmosphere is leading to sea level rise, more unusual weather patterns and intense meteorological events that are beyond what has been recorded historically,” Impact Forecasting added.

“In the next couple of years, we expect that reinsurers will continue to shy away from property catastrophe business, and we consider upticks in risk appetite are unlikely, considering that further price decline in this space has been visible during 2017 renewals,” S&P said in its report released Aug. 14.

In its 2016 annual report, released last winter, Munich Re reported a combined ratio, in P&C reinsurance, of 95.7%, a six-point deterioration from 89.7% in 2015. Swiss Re had similar experience, reporting a combined ratio of 93.5% in 2016, up 7.8 points from 85.7% in 2015. While Hannover Re’s combined ratio actually dropped in 2016 over 2015, SCOR’s combined ratio increased two points, from 91.5% in 2016 to 93.1% in 2016.

Berkshire Hathaway Inc. said in its 2016 annual report that underwriting gains at Berkshire Hathaway Reinsurance Group dropped to US$767 million in 2016 from US$944 million in 2015 and underwriting gains at Gen Re dropped to US$117 million in 2016 from US$150 million in 2015.

Commenting in general, S&P observed that reinsurers “are navigating challenging business conditions by prudently managing their balance sheet exposure to property catastrophe risk.”