Shocking Revelations: Insurers Face Unprecedented Losses While Reinsurers Profit Amidst Climate Chaos

Insurers Struggle with Rising Catastrophe Losses

As the planet continues to warm, natural disasters are becoming more frequent and severe. In 2023 alone, global insured catastrophe losses have consistently surpassed $100 billion for the fourth consecutive year. During the first half of the year, losses hit a staggering $62 billion, far exceeding the 10-year average of $37 billion.

Traditionally, primary insurers mitigate risks by purchasing reinsurance. However, this has become increasingly difficult. Climate change, inflation, and increased property exposure have prompted reinsurers to hike prices and demand more favorable terms, such as higher payout thresholds.

This shift leaves primary insurers bearing greater risks. Charles-Marie Delpuech, an insurance credit analyst at S&P Ratings, describes this as a “structural change” in the market. Indeed, the numbers reflect how reinsurers are faring better, with their share of natural-catastrophe losses dropping from the historical 20% to about 10% in 2023.

Reinsurers’ reluctance to cover smaller, more frequent extreme weather events, known as “secondary perils”, has played a significant role. These include tornadoes, thunderstorms, fires, and floods, which are becoming harder to model and manage due to climate change.

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Impact of Secondary Perils on Insured Losses

Secondary perils are increasingly responsible for a larger share of insured losses. In 2022, severe convective storms alone resulted in approximately $70 billion in insured losses worldwide, accounting for 59% of losses from all natural disasters.

Reinsurers, having been affected by secondary-peril losses in 2021 and 2022, have now reduced their exposure. As a result, a significant portion of losses in 2023 fell primarily on primary insurers, especially in the US, where most severe convective storms occur.

S&P’s findings indicate that reinsurance losses were “well within their budgeted natural-catastrophe load.” Even in the face of a once-in-a-century natural catastrophe, most reinsurers would remain financially robust, maintaining capitalization above the 99.99% confidence level.

Key reasons for this include:

• Higher premiums for reinsurance policies
• Tougher policy conditions and payout thresholds
• Lower exposure to secondary perils

Reinsurers’ Strong Position and Future Projections

Reinsurers now find themselves in a strong position to weather both primary perils, such as major hurricanes, and secondary perils, to which they have limited exposure. This has emboldened them to expand operations but on their own terms, resulting in higher prices and tougher clauses for policy triggers.

Moody’s Ratings has become more optimistic about the reinsurance sector, recently upgrading its outlook to “positive” from “stable.” This shift is attributed to several factors, including higher premiums, stricter policy conditions, and reduced exposure to secondary perils.

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January renewals saw the top 19 reinsurers increasing their average overall risk exposure to natural catastrophes by 14%. Their combined budget for absorbing “nat-cat” losses also saw a significant jump, reaching $19.2 billion in 2024 from $17.1 billion in 2023 and $15.5 billion in 2022.

S&P expects global reinsurers to deploy more capital over the next two years. The industry earned its cost of capital in 2023 for the first time in four years, with projections indicating a similar trend for 2024 and 2025, further solidifying the stable view of the sector.