Reinsurers to maintain strict terms amid rising secondary peril risks – Fitch

Fitch Ratings indicated that global reinsurers are likely to maintain stringent terms and conditions to limit their exposure to secondary peril events, as climate change contributes to increasingly significant and volatile weather-related losses.

According to Fitch’s report, the tightening of terms and conditions for natural catastrophe coverage is viewed as a structural improvement that enhances reinsurers’ risk profiles and long-term profitability. Fitch does not expect these changes to be reversed quickly, even as market conditions evolve.

As a result, primary insurers are retaining more risk from secondary peril events, although reinsurers continue to provide substantial coverage for the most severe events.

Losses from natural catastrophes in the first half of 2024 were largely driven by medium-sized events, including multiple convective storms in the US. The combination of reinsurers’ strategies to limit exposure to these events and increased risk retention by primary insurers meant that reinsurers’ losses remained within budget.

Higher attachment points and fewer aggregate covers resulted in primary insurers absorbing most of the losses, preventing significant reinsurance payouts.

The reinsurance sector’s profitability has been strong, supported by sharp property catastrophe price increases in recent years. Fitch expects property catastrophe prices to ease moderately, but it anticipates that reinsurers will continue to impose strict limits on lower layers of natural catastrophe protection, reduce reliance on aggregate covers, and maintain a disciplined underwriting approach.

This caution is further driven by a lack of new capacity in the market and the rising catastrophe risk due to climate change and property exposure growth.

The 19 non-life reinsurers monitored by Fitch reported solid underwriting profitability in the first half of 2024, with an aggregate reinsurance combined ratio of 84.2%, an improvement from 85.9% in the first half of 2023. Natural catastrophe losses accounted for 5.9 percentage points of the combined ratio.

Europe’s four leading reinsurers—Hannover Re, Munich Re, SCOR, and Swiss Re—posted strong earnings, with their average property and casualty reinsurance combined ratio improving to 84.2% from 86% in the previous year. This was attributed to significant rate increases, tighter terms and conditions, and a relatively low incidence of large losses.

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