Reinsurance peaking, capital rising, but profitable growth opportunity persists: Fitch

The global reinsurance market pricing cycle is peaking and rising levels of both traditional and alternative capital is one driver, but still the market remains very attractive and profitable growth opportunities persist, according to Fitch Ratings.

Fitch notes that the results of the January 2024 renewals for the big four European reinsurance giants show that their margins are now close to peaking.

The reason is that “supply-and-demand dynamics” have become more balanced, the rating agency says, helped by rising capital in the insurance-linked securities (ILS) market, as well as stabilisation of overall global reinsurance capital.

“This is in line with our belief at last year that margins would slightly improve and then peak this year, with property catastrophe market dynamics slowing. It is also consistent with the expectations underpinning our improving global reinsurance sector outlook for 2024,” Fitch Ratings explained.

Positively though, while the market may be peaking and pricing has certainly softened at some points in the risk curve for property catastrophe reinsurance exposures, Fitch still believes the current market environment is a strong foundation for growth.

“Market conditions remain favourable, providing opportunities for further profitable growth,” the rating agency said, noting that at the renewals underwriting conditions reflected “sharply improved technical profitability.”

Good market conditions in reinsurance allowed for an 8.3% average increase in premium volumes at the renewals for the big four reinsurers, Fitch said.

“This is in contrast to the January 2023 renewals, when premium volumes were broadly flat,” the rating agency continued.

Going on to say that, “The renewals showed the reinsurers’ preference for property catastrophe, speciality lines and tailored solutions, with more caution over US casualty business due to the effect of high inflation on claims.

“The reinsurers’ maintained their underwriting discipline in natural catastrophe lines, particularly on attachment points. Rate increases were generally higher than for other lines, particularly for excess-of-loss treaties.”

Through the rest of 2024, Fitch forecasts that, “We expect strong underwriting profitability to continue supporting the reinsurers’ ratings this year, with price levels and favourable terms and conditions adequately compensating for high claims inflation.”

Robert Mazzuoli, CFA, Fitch Ratings, commented, “The January 2024 renewals have concluded in an orderly fashion as reinsurers and alternative capital providers returned to the property cat market, providing more capacity for higher layers of protection. We expect reinsurance capacity to rise in 2024, prompting softer market conditions in 2025.”

The opportunity is now so strong that some capacity providers are going to be determined to deploy capital in the current market environment, which does risk any softening accelerating.

But the opportunity remains very attractive and, as long as discipline is sustained on terms, particularly attachment points, capital deployed into the reinsurance market in 2024 should deliver the returns ILS investors and traditional reinsurers are hoping for, loss activity allowing.