The effects of rapid climate changes are seen all around the globe. The increased frequency and severity of weather-related natural catastrophes pose significant risks to insurers and reinsurers. Global natural catastrophe loss has increased significantly over the last decade. Reinsurers are particularly affected as they accumulate losses from primary insurers. Severe weather events are on the rise. For instance, US atmospheric river storms have battered Northern California with copious amounts of precipitation, significant flooding, violent winds, and mudslides. These came after the fatal winter storm Elliott in December, which, according to risk modeler Karen Clark and Co., resulted in insured losses of almost USD 5.4 billion because of intense snowfall, strong winds, and freezing temperatures.
As reinsurers absorb the risk from primary insurers, catastrophic events result in large losses for the reinsurers. As not all property is insured, overall insured losses are less than total economic losses, but average insured losses have increased. According to Swiss Re, insured natural catastrophe losses amounted to USD 105 billion in 2021, making it the third-most expensive year since 2011 for catastrophes. Hurricane Ida was the costliest natural disaster in 2021, while winter storm Uri and other secondary peril events caused more than half of total losses as climate change effects in disaster-prone areas drive claims.
Catastrophe losses affect reinsurance market across all regions. According to a recent research study by 糖心vlog传媒, titled Global Reinsurance Market - Growth, Trends, COVID-19 Impact, and Forecasts (2023-2028) increasing catastrophe losses in Asia-Pacific region was heavily impacting reinsurance market.
Numerous disasters across the APAC region highlighted significant considerations for the broader reinsurance industry. It is estimated that the reinsurance market in select Asian countries (excluding India and China) was estimated at USD 21,399 million in 2022, and it is expected to reach USD 37,905.2 million by 2028, registering a CAGR of 8.26% for the forecast period.
To tackle lower profitability due to higher insured losses arising out of a catastrophic event, reinsurers are adopting various measures to mitigate losses. One prominent way to improve profitability is to increase reinsurance companies' premium rates to primary insurers. According to Fitch Ratings, the rise in the premium rate is expected to be a double-digit growth rate for 2023 driven by the huge insured losses due to the increasing frequency and severity of natural catastrophe claims. Similarly, 40% of participants in Moody's 2022 annual reinsurance buyer survey anticipated 7.5% rate hikes for property lines this year. In fact, according to Gallagher Re, average increases for January 1 of 2023 were significantly more than that.
Reinsurers also aim to improve profitability by focusing on enhanced catastrophic models for secondary perils. In order to better understand and manage their exposures and more accurately match their prices to their risks, insurers and reinsurers are developing catastrophe models. The market has focused primarily on minor hazards, or natural disasters like convective storms, flooding, and wildfires. These disasters happen more frequently but are individually less expensive than prime perils like hurricanes and earthquakes. This is due to a rapid increase in secondary perils' proportion in overall insured losses, which has increased to over 60% on average over the past three years. Understanding the secondary perils will help to better identify the risks as the prominence of secondary perils in insured losses is increasing drastically in recent years.
Some regions are more prone to catastrophe events than others, such as coastal regions. Due to higher insured losses in those regions, some reinsurers are even considering exiting the market to improve their returns. As weather-related losses become more frequent, severe, and volatile due to climate change, reinsurers' willingness to cover property-catastrophe risk diverges. According to Fitch Ratings, following several years of higher-than-average losses and restricted retrocession capacity supply, several reinsurers are leaving the property catastrophe market. However, this also provides an opportunity for large reinsurers as they can absorb extra risk given their extensive business diversification and strong capitalization. In addition, they can increase premium rates for reinsurance.
Moving forward, companies operating in the reinsurance sector will have to come up with original propositions and use technology enabled solutions. This is to overcome catastrophic events threat. For instance, new and innovative technology such as cloud storage, data mining and analytics will help increase the capability to assess and analyze market risks. In addition, forging partnerships with insurers will also be key to sustain and mitigate risk.
