Very strong capital adequacy at global reinsurers continues to provide a cushion even as 2021 is likely to be the fifth year in a row of natural catastrophe losses at or above budget expectations, S&P Global Ratings says, including more than $US20 billion ($26.94 billion) of COVID-related insured losses in the past 18 months.

S&P says if a never-seen 1-in-100-year event hits, causing losses in excess of $US250 billion ($337 billion) across the entire insurance industry, 13 of the Top 21 global reinsurers would maintain a buffer at their current S&P Global Ratings capital adequacy level.

“The sector remains resilient to extreme events because of its robust capital,” the ratings agency says, though earnings volatility could be higher as alternative capital to retrocede peak perils has increased in cost.

Improved pricing has led to a divergence in reinsurer strategies, with some increasing their property catastrophe risk appetite and others maintaining a defensive stance.

S&P expects property catastrophe reinsurance pricing during the 2022 renewals to rise in reaction to the 2021 elevated losses.

“Overall, reinsurance pricing has been hardening over the past couple of years, but at a decelerating rate,” it said. “While some reinsurers are increasing their market shares, taking on increased catastrophe risk and leveraging their alternative capital vehicles, others are reducing their risk appetite for natural catastrophe, given the inherent volatility of this line of business. We expect this divide will likely widen in the upcoming renewals in 2022.”

The top 21 reinsurers budgeted about $US13 billion ($16.84 billion) for natural catastrophe losses in 2021 and S&P expects further rate hardening going forward and has seen “no sign” global reinsurers are ceding less of their exposure.

Last year, the top 21 budgeted losses of about $US12.5 billion ($16.84 billion), representing about 6 percentage points of the combined ratio, and picked up about 15% of the industry's total insured catastrophe losses, which stood at a high $US81 billion ($109 billion).

Secondary perils like convective storms or wildfires, which were exceptionally frequent in 2020, generally produce small to midsize losses and are typically retained by the primary insurance market. Aggregate losses were therefore broadly in line with their budgeted catastrophe losses for 2020.

“This marked the fourth consecutive year in which the top 21 global reinsurers' annual budget has been consumed,” S&P said. “It has become more complicated to assess what a normal natural catastrophe year would look like.

“Reinsurers can hope that losses would normalise at some point, but for now, they are seeing unrewarded earnings and balance sheet volatility. It is not yet clear how long they will accept such an unpropitious situation.”

US windstorm continues to represent the biggest peak peril, though the relative contribution of this peril fell by 3 percentage points on average over the past two years.