As Nat Cat business has become largely loss-making in recent years after many years of soft market, global reinsurers are cutting back on the cover they provide against medium-sized natural catastrophe risks, mostly by tightening T&C, Fitch Ratings says, adding that under the investors’ pressure reinsurers are looking now to other parts of the market showing better profitability.

Some companies were already retreating from the property-casualty market in 2022 but even the strongest reinsurers have now pulled back, largely through tightening their terms and conditions to limit their aggregate covers and low layers of natural catastrophe protectio, Fitch explained. This leaves primary insurers much less protected against secondary peril events. However, reinsurers still offer ample cover against the most severe events. The reinsurance market appears to have returned to its pre-soft market state of providing capital protection for cedents, rather than earnings protection.

According to the broker Aon, insured natural catastrophe costs reached USD 53 billion globally in 1H23, which is 47% above the 20-year average. Nevertheless, the 18 non-life reinsurers monitored by Fitch reported strong underwriting profitability in 1H23, with an aggregate reinsurance combined ratio (claims and expenses to premiums) of 88%, slightly improved against the 1H22 value of 89.4%. This was driven by the above-claims-inflation price increases in many business lines, as well as the lower natural catastrophe burden as cedents retained more of the losses themselves. The aggregate ratio included moderate losses of 6.7pp from natural catastrophes.

Yet, natural catastrophe business has become largely loss-making in recent years as prices have failed to keep pace with increasingly frequent, severe and volatile weather-related losses due to climate change. This has reduced reinsurers’ appetite to provide natural catastrophe cover, particularly as other business lines are now benefitting from price rises that are higher than claims inflation. Tighter terms and conditions for natural catastrophe cover are a structural improvement that should benefit reinsurers’ risk profiles in the medium term as they are unlikely to be quickly reversed even when market conditions change.

Meanwhile, profits in life reinsurance returned to pre-pandemic levels thanks to significantly lower excess mortality claims linked to the pandemic, and investment performance benefited significantly from a rebound in equity markets and higher reinvestment rates as interest rates stabilised at higher levels.

Reinsurance price momentum continued during the June and July 2023 renewals. US property-catastrophe markets had the largest price rises, with 30%-75% increases for loss-hit business and 10%-40% for loss-free business. In contrast, premium rates for casualty lines were broadly stable, reflecting the greater capacity allocated to them.

Fitch expects reinsurers to maintaining strong underwriting discipline despite higher interest rates and for reinsurance market hardening to persist into 2024. However, price increases are likely to be more moderate than in 2023 as rate adequacy has generally been reached through several rounds of hardening since 2018.