Reinsurance pricing base case for 2025, a reversion to ~2023 levels: J.P. Morgan
Analysts at J.P. Morgan believe that the reinsurance market may simply wind back the clock one year at renewal seasons in 2025, with the firm’s base case for reinsurance pricing being for a reversion to roughly 2023 levels.
The expectation is for a relatively stable reinsurance market environment, with no significant shifts expected, which has been helped by the hurricane losses from recent months, as absent these we may have been looking at a more meaningful level of softening, it seems.
The J.P. Morgan analyst team explained, “In reinsurance, the market is expected to stabilise with pricing likely to see minor declines (in the low single digits we believe) in 2025 which would still leave pricing at healthy levels.
“Our base case is for pricing to return to around 2023 levels, which was a year where the reinsurers produced strong margins.
“More importantly, we expect terms and conditions to remain firm, with the higher attachment points achieved in 2023/24 expected to hold, which should support profitability.”
Helpfully, we can look at what such a reversion of one year might mean in the property catastrophe reinsurance space by looking at Guy Carpenter’s rate indices, which are a useful measure of brokered excess-of-loss rate movements over time.
Across all regions, the Guy Carpenter Global Property Rate on Line Index rose by 5.4% in 2024, so winding back one year would suggest that much could be lost over the course of the reinsurance renewals in 2025.
But, rate movements are not uniform, so on examining the Guy Carpenter U.S. Property Rate on Line Index, it shows that property cat reinsurance rates-on-line only rose 1.2% across the United States in 2024.
Other regional views are possible with the Guy Carpenter Regional Property Rate on Line Index, that shows Asian property catastrophe reinsurance rates up by 1.8% in 2024, but European rates up by approaching 8%.
While the analysts are calling for rates to revert back to 2023 levels, which remember was the most profitable year for some time for the reinsurance sector and saw record returns delivered by the catastrophe bond and broader insurance-linked securities (ILS) market, the reversion in rates is not going to be a flat mid-single digit affair.
Europe, for example, is unlikely to see an 8% reversion in the Guy Carpenter Index level, with quite significant severe weather and catastrophe losses impacting the continent over the course of 2024 and reinsurers already saying they are keen to see a stable renewal there.
The United States is also likely to see regional differentiation at reinsurance renewals in 2025, with still challenged southern and coastal states, as well as wildfire exposed, likely to see the most stable outcomes.
The analysts forecast a “likely slowing down in the reinsurance market in 2025,” but no return to soft markets of the past, it seems.
As we discussed in an article yesterday, reinsurance buyers are feeling a little more confident about the availability of aggregate limit coverage in 2025, especially from cat bonds and the capital markets. But, they are not hopeful on their attachments moving, which aligns with the analysts forecast that terms are unlikely to see any dramatic changes next year.
With prices looking set to decline a little, this can also give buyers an additional lever for their reinsurance negotiations.
It is worth noting that pricing has noticeably softened in the catastrophe bond market, year-on-year and while a reversion to 2023 pricing in reinsurance might sound like returns from that year should be reproduced, there were other factors involved in the 2023 records that will not be repeated.
But, if the base case from the J.P. Morgan analysts pans out, then the cat bond and ILS market will retain elevated spreads and have another chance of achieving another year of attractive returns.
