Higher Exposures and Shrinking Risk Appetite

Edited December 22nd, 2023 by Kyle Langan

Exposure Growth and Global Reinsurance Capital: 2022 Results

After Hurricane Ian, traditional and alternative capital declined by around 20-25% at 2022’s close, compared from 2021’s close. [1] After adjusting for the interest rate impact of mark-to-market losses on fixed income securities, Swiss Re estimated a “decline in capital of around 5%. [2] However, exposures – proxied by GDP – continue to rise fast. [3] This has created a gap between supply and demand.” [4] Exposure refers to the “state of being subject to loss because of some hazard or contingency.” [5]

With these conditions, what is the impact on the insurance market?

“Higher exposures and shrinking risk appetite typically result in rising prices, higher retentions and tighter terms and conditions.” [6] The prospect of still-elevated catastrophe losses and constrained capacity come as geopolitical, economic and environmental uncertainties remain omnipresent.” [7] Analysts may downgrade financial ratings, like Scottsdale Insurance Company, which A.M. Best lowered to ‘A’ on December 7, 2023. [8] Tail risk from infectious diseases should remain a risk management priority; a lurking systemic cyber event with destructive potential is another tail exposure to monitor. [9]

Capital (GAAP Reporting)

2021 = 116.3

2022 = 96.6

Decrease = 17%

Capital (Solvency Reporting)

2021 = 113

2022 = 108.1

Decrease = 4.3%

Exposure (~GDP)

2021 = 112.2

2022 = 122.1

Increase = 8.8%

Source: AM Best, Swiss Re Institute

References

[1-4]; [6-7] Continued high losses from natural catastrophes in 2022: Swiss re. Continued high losses from natural catastrophes in 2022 | Swiss Re. (2023, November 14). https://www.swissre.com/institute/research/sigma-research/sigma-2023-01/5-charts-losses-natural-catastrophes.html

[5] Exposure. IRMI. (n.d.). https://www.irmi.com/term/insurance-definitions/exposure#:~:text=Exposure%20refers%20to%20the%20state,of%20some%20hazard%20or%20contingency.

[8] Scottsdale Insurance Company – Ratings.ambest.com. (2023, December). https://ratings.ambest.com/disclosurepdf.aspx?ambnum=3292

[9] Cirillo, P., & Taleb, N. N. (2020, May 25). Tail risk of contagious diseases. Nature News. https://www.nature.com/articles/s41567-020-0921-x
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