The insured insurer
To protect themselves against major losses, insurance companies spread their risks by taking out reinsurance policies. This enables them to limit potential losses, acting as "insurance for insurers" and preventing any single company from bearing too heavy a burden in the event of a catastrophe. Reinsurers therefore offer a range of products that enable traditional insurers to transfer risks they are unable to bear.
There are two main contracts: Treaty reinsurance, where an insurer cedes all the risks in a given category to a reinsurer, thereby securing its funds and stabilizing its position in the face of major events. Facultative reinsurance, on the other hand, is coverage purchased by an insurer to cover a single risk or a block of risks. Treaty reinsurance is generally part of a long-term coverage agreement between two parties.
These insurances - or rather reinsurances - can be considered either proportional or non-proportional. In the first case, the reinsurer receives a proportional share of all premiums sold by the insurer. In the event of a claim, the reinsurer assumes part of the loss on the basis of a pre-negotiated percentage. In the second case, the reinsurer is liable for the insurer's losses in excess of a specified amount, known as the priority or retention limit.
Source: Is insurance against natural catastrophes sustainable? Digital Initiative
Record performance...
Before Hurricane Milton, the insurers' insurers were doing better than ever. In the first half of 2024, Munich Re, the world's leading reinsurer, posted unprecedented earnings of 3.76 billion euros. Following this trend, number two Swiss Re and number three Hannover Re posted profits of $2.1 billion and €1.2 billion respectively, marking annual profit growth of 17% and 21% respectively.
Every year, all reinsurance contracts are renegotiated on January 1, following the so-called "Renewal season" - a period when the major reinsurers meet to discuss the direction of future market trends. However, escalating weather claims and rising inflation have led reinsurers to increase their rates in 2023, with upward adjustments in 2024. At the same time, they have tightened the conditions under which their policyholders can transfer part of their risks, especially in the area of natural catastrophes.
The ROE of the top twenty reinsurers has risen from 3% in 2022 to 19% in 2023, according to Moody's data. This rate of return is the highest since 2010, characterized by a decline in the claims ratio (ratio of cost of claims settled to premiums paid and an increase in the profitability of reinsurers' investment portfolios, stimulated by rising interest rates.
... threatened by extraordinary catastrophes
However, Barclays analysts warn that Hurricane Milton could exceed $60 billion in insured losses and weigh on European reinsurers' results. The hurricane, classified as Category 5 on the Saffir-Simpson scale, could become one of the most destructive ever to hit the southeastern United States, which is still recovering from the devastation caused by Hurricane Helene less than two weeks ago. Cost estimates are based on similarities with the costs incurred by Hurricane Ian in 2022, ranking as the second most expensive hurricane according to Swiss Re Institute.
This event is bad news for reinsurers in the short term, but could be beneficial in the long term. Indeed, it could trigger a rise in reinsurance rates in 2025, likely to boost the shares of certain groups in the sector.
Shares in reinsurers Swiss Re (-2.9%) and Munich Re (-1.3%), as well as Beazley (-2.5%), Hiscox (-2.3%) and Lancashire (-7.9%), fell this week in the run-up to Milton, even though some of them had recently reached record levels on the stock market. This shows that the biggest reinsurers are better able to absorb the shocks induced by extraordinary events.
Scor is undoubtedly the company that fares worst. The French reinsurer, which posted a net loss of 275 million euros due to Hurricane Ian at the end of 2022, has been striving to reduce its exposure to natural catastrophes for several years. Its share price has fallen by 25% since the beginning of the year.
