Reinsurance, retro key to managing catastrophe risks under climate disaster stress tests: S&P

A recent series of stress tests conducted by S&P Global Ratings on a number of different insurers and reinsurers, to see how they would withstand a 1-in-250-year catastrophe event has showcased the importance that both reinsurance and retrocession bring towards managing catastrophe risks.

“The insurance industry faces an escalating threat from extreme weather. Hurricane Ian in 2022, for example, caused about US$60 billion in damage, and last year’s California wildfires resulted in more than US$40 billion in claims. Such incidents are pushing insurers–and reinsurers–to reassess their risk exposure,” S&P said in a new report.

“Insured losses globally exceeded US$100 billion in 2025 for the sixth consecutive year. This dynamic does not appear to be going away–the industry is adjusting to a reality where extreme weather is increasingly common.”

Given this, the agency recently stress-tested global insurers, primary insurers and reinsurers, in order to see how they would withstand a 1-in-250-year catastrophe event.

“Our model shows that credit quality remains broadly stable, largely due to high capitalization and ample use of reinsurance and retrocession. Our stress test further highlights that our credit ratings appropriately incorporate exposure to natural catastrophes,” commented S&P Global Ratings credit analyst Craig Bennett.

Moreover, S&P’s findings indicate that most insurer ratings would likely remain stable even under such an extreme scenario.

The agency attributes this to strong capital positions, disciplined risk management and extensive use of reinsurance structures. The firm also noted that insurers’ resilience is largely shaped by how effectively they manage exposure, the quality of their reinsurance protection and the capital buffers they maintain.

At the same time, S&P also acknowledges the role of reinsurance and retrocession arrangements in reducing net losses when it comes to extreme catastrophe events.

S&P’s stress test shows that a 1-in-250-year event would be manageable for most insurers, with the largest 50 insurers (by gross exposure) retaining an 18% capital surplus, on average, in the agency’s test, while catastrophe risk accounted for about 70% of the remaining capital surplus after a 1-in-250- year disaster, on average.

S&P’s data also shows that collectively, the top-50 insurers face roughly US$430 billion in gross exposure to natural catastrophe risk in a 1-in-250-year event, while reinsurance and retrocession reduce mean exposure to roughly 15% of capital (US$225 billion net), from 34%.

Additionally, S&P Global Ratings also reports that in general, expected losses from a 1-in-250-year event would represent a relatively small proportion of capital and could largely be absorbed through ongoing earnings.

S&P Global Ratings additionally indicates that average capital buffers would decrease under extreme stress scenarios; however, they would generally continue to be adequate to uphold the current ratings for the majority of insurers.

It’s important to also highlight that S&P observes that larger insurance groups typically tend to be less exposed to concentrated risks and make less use of reinsurance than smaller peers.

However, across the market, reinsurance continues to be extensively utilised and is regarded as a crucial element in mitigating exposure to significant loss events.

In summary, S&P Global Ratings concludes that while the frequency and magnitude of climate-related losses are on the rise, the majority of global insurers remain well positioned to withstand severe catastrophe scenarios, which is heavily supported by robust capital reserves, effective risk management practices and comprehensive reinsurance coverage.

“Most of our ratings on insurers and reinsurers could likely withstand a 1-in-250-year climate disaster. Our assessment highlights the strength of credit quality among most rated insurers, even when exposed to severe natural catastrophes,” S&P concluded.