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Johannes Bender and WenWen Chen of S&P Global Ratings
30 October 2019Insurance

Global cat: is now the time to grow?

As rates harden in some lines of business, Johannes Bender and WenWen Chen of S&P Global Ratings assess the strategic response of reinsurers.

“There are no substitutes for underwriting discipline, adequate pricing, prudent reserving and tight exposure management.” 

How would you characterise the reaction of reinsurers to the recent price uptick?
Johannes Bender: S&P Global Ratings has noted that reinsurers’ strategic reaction to the price uptick, amid heightened catastrophe activities, has diverged. Most of the top 20 reinsurers chose to increase their exposure relative to capital, to benefit from the slightly improved conditions. A few stuck with defensive measures, allowing their exposure to contract further, as they had in 2018.

On average, reinsurers’ property-catastrophe risk appetite at a 1-in-250-year return period rose to 29 percent of shareholder equity, but some reinsurers saw reductions of more than 5 percentage points. Meanwhile, alternative capital growth seems to have paused, at least temporarily, but this did not materially shift reinsurers’ retrocession strategies.

WenWen Chen: Regional reinsurers’ catastrophe exposures are gradually increasing, on the back of rapid urbanisation and their growing overseas presences. The heightened natural catastrophe exposures could also stem from still low, but rising, catastrophe penetration and the primary market’s product structural shift, such as in China.

That said, those few key regional reinsurers’ catastrophe exposures remain lower than that of their global peers, with net 1-in-250-year exposures mostly sitting below 20 percent of total shareholders’ equity.

How has the risk appetite on natural catastrophe business changed?
Bender: More than half of the top 20 reinsurers are exposed to property catastrophe risk more than last year, partly because of exposure growth and partly through capital deterioration.

Although some individual reinsurers made material exposure changes, across the peer group, we estimate that capital-at-risk exposure rose to 29 percent of total shareholders’ equity exposed in January 2019, from 27 percent in the same period in 2018.

The positive price movements inspired about half of the top 20 reinsurers to increase their absolute net exposure to a 1-in-250-year aggregate loss by more than 10 percent. Meanwhile, as in 2018, some reinsurers chose to reduce their exposure to extreme events by more than 5 percentage points.

Chen: Asia-Pacific’s share of natural catastrophes had been on the rise for the past two years. Japan and Southern China faced the increasing strength of typhoons and unprecedented rainfall in recent years. Without surprises, the region’s reinsurers have been impacted.

We believe the need to diversify their exposures becomes increasingly important and high on the agendas of regional reinsurers. To support this gradual exposure to global catastrophes and to ready themselves, dominant regional reinsurers have undertaken various mergers and acquisitions efforts. Examples are China Re’s acquisition of Chaucer Holdings and Korean Re’s setting up of a subsidiary in Switzerland.

What is the impact on pricing after natural catastrophes such as in Japan or the US?
Bender: 2017’s and 2018’s catastrophes jogged reinsurers’ memories, sending reminders that there are inherent uncertainties in the nature of this business and that there are no substitutes for underwriting discipline, adequate pricing, prudent reserving and tight exposure management.

With record back-to back catastrophe losses in 2017–2018, higher losses in certain business lines, and loss creeps from Hurricane Irma and Typhoon Jebi, global reinsurance pricing has been hardening in 2019 in loss-affected lines and regions.

In Japan, catastrophe loss-hit property rates rose by 15 to 25 percent at the April 2019 renewal. We expect the resulting catastrophe losses from Faxai, Hagibis and Hurricane Dorian at least to provide further support to the firming rate environment in 2020, in particular in Japan and the US.

What roles can regional reinsurers play to support catastrophe reinsurance development within emerging Asia?
Chen: The protection gap remains wide. Property & casualty insurance penetration in emerging Asia, particularly China, remains low. Amid rapid urbanisation and increasing economic activity, the vulnerability to significant human and economic losses increases.

This is particularly so for China’s coastal cities, which contribute significantly to the country’s gross domestic product. The country’s largest non-life reinsurer, Chine Re P&C, has been playing a leading role in setting pricing at China’s agricultural reinsurance pool (since 2014) and China Residential Earthquake Insurance Pool (since 2015).

Beyond pursuit of profitable growth, we believe regional reinsurers play an important role in developing local markets’ underwriting ability towards non-motor related covers. This is crucial as direct insurers diversify their product offerings.

We believe the provision of underwriting capacity and strengthening risk knowhow will provide a more sustainable growth model for the broader insurance sector.

Johannes Bender is a credit analyst at S&P Global Ratings. He can be contacted at:  johannes.bender@spglobal.com
WenWen Chen is a credit analyst at S&P Global Ratings. She can be contacted at:  wenwen.chen@spglobal.com

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