Global Reinsurers Pulling Back on Natural Catastrophe Coverage

Global reinsurers are cutting back on the coverage they provide for medium-sized natural catastrophe risks in response to investor pressure after several years of large catastrophe losses and improved profitability in other areas of the market, according to Fitch Ratings.

While some reinsurers were already pulling back from the property-casualty market in 2022, even the strongest reinsurers have now pulled back, largely by tightening terms and conditions to limit their aggregate covers and low layers of natural catastrophe protection, Fitch said. The result is that primary insurers are less protected against secondary peril events, the rating agency said.

"The reinsurance market appears to have returned to its pre-soft market state of providing capital protection for cedents, rather than earnings protection," an August 24, 2023, Fitch statement said.

Fitch said reinsurers have frequently seen losses from natural catastrophe business in recent years as prices have failed to keep pace with the increasingly frequent, severe, and volatile weather-related losses resulting from climate change. That's reduced reinsurers' appetite to provide natural catastrophe coverage, the rating agency said, as other lines of business have benefited from price increases that have outpaced 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," Fitch said.

Fitch said that reinsurance price momentum continued at June and July renewals this year. US property-catastrophe markets saw the largest price increase, with 30 percent to 75 percent increases for business that had experienced losses and 10 percent to 40 percent increases for loss-free business. In contrast, casualty reinsurance premiums were largely stable, the rating agency said, reflecting the greater capacity allocated to that area of the business.

Fitch said it expects reinsurers to maintain strong underwriting discipline despite higher interest rates and for reinsurance market hardening to continue into 2024. Prices increases are likely to be more moderate in 2024 than this year, however, as reinsurance rate adequacy has largely been reached through several rounds of hardening since 2018, according to Fitch.