Proposed prudential changes that would encourage the industry to explore alternative reinsurance options such as catastrophe bonds come with trade-offs, according to Fitch Ratings.

The Australian Prudential Regulation Authority is seeking submissions on capital requirements relating to all perils, reinstatement and reinstatement premium conditions.

Fitch says the planned reforms would require general insurers to buy all-perils reinsurance coverage while lowering reinstatement requirements and removing the need to hold reinstatement premiums as part of the insurance concentration risk charge.

“Lower reinstatement requirements should reduce costs, but the aggregate impact of the proposals is unclear, as requiring all-perils reinsurance cover rather than named perils is likely to drive up costs,” the ratings agency says. “Moreover, regulatory adjustments alone may be insufficient to reduce reinsurance costs if catastrophe losses borne by reinsurers continue to escalate.

“Capacity may also become a constraint ... global reinsurers showed reduced appetite for all-perils cover during the 2023 renewals.”

Fitch says insurers’ use of reinsurance is also influenced by factors such as internal risk appetite and ratings agency capital considerations.

“Where these are the main driver of how much catastrophe risk is retained, APRA’s proposals may have less effect on retention rates.”

Fitch says catastrophe reinsurance pricing and the frequency and severity of natural disasters will remain important factors in determining insurers’ willingness to take on reinsurance, and thus the long-term effect on their capital and earnings.