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 to 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 = 112.2

2022 = 122.1

Increase = 8.8%

Source: AM Best, Swiss Re Institute