S&P warns of worsening climate risks: Reinsurance giants are taking evasive action, putting pressure on primary insurance companies.

With natural disasters becoming more frequent and destructive, obtaining a key insurance measure aimed at helping to compensate for losses is becoming increasingly difficult. According to Simon Ashworth, Chief Analyst of the insurance rating department at S&P Global, in the past five years, the top 19 reinsurers in the world have reduced their exposure to insurance catastrophic losses by more than half, and their future loss burden may be lower than before. The reinsurance industry is aimed at helping primary insurance companies deal with losses when disasters occur. The industry has taken significant measures to protect itself from the financial impact of storms, floods, and other severe weather events. Ashworth said in an interview, "I don't think this trend will reverse in the short term, it is truly amazing." After years of loss avoidance and accumulating funds through investments, the industry has established a sizable buffer mechanism. According to S&P, large reinsurers now have enough funds to cover insurance losses equivalent to three "Katrina" hurricanes in a year, about $300 billion, while maintaining their current credit ratings. Natural disaster-induced insurance losses are expected to exceed $150 billion this year, according to risk assessment agency Verisk, much higher than the average level of the past 10 years. While major insurance companies are facing cost pressures, reinsurers are under urgent pressure to lower premiums and expand coverage. S&P believes that reinsurers will experience "moderate rate declines", which Ashworth says "will help alleviate some of the pressure on major insurance companies." However, he also pointed out that overall, the industry seems to be "sticking to established terms and conditions." According to S&P data, reinsurers covered slightly more than 10% of catastrophic losses last year, compared to around 25% in 2019, far below the historical average of 20%. Fitch Ratings noted in a recent report, "Many reinsurance companies are becoming increasingly cautious, placing more emphasis on profitability rather than growth, and rejecting business that does not meet strict risk-return standards. Especially in the property and casualty insurance sector in the United States." This week, reinsurer members gathered in Monaco for their annual meeting. During this time, executives will discuss how to deal with changing market trends together. Moody's rating agency says these trends include the expectation by primary insurance companies that reinsurers will lower their prices. Moody's survey of reinsurers found that three-quarters of respondents expect property reinsurance prices to decrease, with some even predicting a drop of up to 7.5% next year. Moody's also pointed out that in the long run, severe weather will pose a "major challenge" to the reinsurance industry as the frequency of natural disasters increases. Moody's said that in the 1970s, there were about 50 extreme weather events each year; in the past decade, this number has approached 200. Moody's stated that reinsurers also face greater losses in the form of "secondary disasters", such as severe thunderstorms and wildfires. And for parties trading insurance-linked securities like catastrophe bonds, modeling these events is also challenging. Eveline Takken-Somers, Insurance-linked Investment Manager at Dutch pension fund investor PGGM, said, "The difficulty with secondary risks is these risks are often harder to model and therefore harder to price. It is important to update these models." PGGM manages 7.5 billion euros (about $8.8 billion) in insurance-linked assets. Currently, reinsurers have reduced their risks for secondary risks by increasing deductibles. The industry has set a budget of $210 billion to cover disaster losses by 2025, but so far, only half of it has been used. In contrast, according to Ashworth, major primary insurance companies in the U.S. have already used 80% of their budget, largely due to the impact of the California wildfires.