Role of reinsurance, retrocession and pricing in net losses
The report explains how risk transfer and catastrophe pricing shape net risk. The 50 insurers with the largest natural catastrophe exposures face a combined aggregate risk of approximately $430 billion under a 1-250-year event. After reinsurance and retrocession, the average exposure reduces from about 34% of capital to about 15%, or about $225 billion on a net basis. Catastrophe premium loading further reduces the residual risk, bringing the average net risk to capital to about 8%. In the 1 in 250 model scenario, S&P estimated that capital would decline on average by about 8%, a level that, in many cases, could be covered by a year’s earnings. According to the agency, reinsurance utilization across all insurer types is roughly stable at around 50%. Large insurance groups in the sample show low risk concentration and relatively low reliance on reinsurance: in S&P’s scenario, the net exposure of capital to the group falls to about 20%, supported by an average reinsurance cover of about 50%.