Reinsurance sector now “improving”, but softening expected from 2025: Fitch

In revising its outlook on the global reinsurance sector outlook to ‘improving’ from ‘neutral’ to reflect the sector’s strengthening financial performance into 2024, Fitch Ratings has also cautioned that with capital building again, not least in catastrophe bonds and ILS, a gradual softening of the market can be expected from 2025.

So, while things are improving, including the profitability of the global reinsurance community, as well as returns in insurance-linked securities (ILS), there are perhaps no guarantees at this stage for how long the elevated returns and profits are available.

“Near-term price rises are likely to outpace increases in claims costs and we expect underwriting margins to peak next year. Meanwhile, rising reinvestment yields and strong demand for reinsurance should increasingly support earnings,” Fitch explained.

Adding that, “We believe pricing for natural catastrophe risks will better reflect the impact of climate change on claims, particularly as several reinsurers are cutting back on cover for medium-sized natural catastrophe risks, making pricing less competitive.”

The rating agency continued to say, “Further price rises in property lines are likely in 2024, together with tighter terms and conditions, after several years of poor underwriting results due to inadequately priced risks, the impact of climate change on claims, and unexpectedly high inflation.”

But noted that, “However, the increases are likely to be more moderate than in 2023 as prices approach or surpass rate adequacy.”

Capital is rebuilding in reinsurance and the ILS market, with both expected to continue and this is what leads Fitch to suggest that some softening is likely further ahead.

In fact, Fitch cautions that higher returns could drive more capital to ILS strategies, which it sees as a potential risk to pricing, although it doesn’t make it clear if softening would affect its view that price adequacy has been reached, so it’s hard to tell how much softening might cause a reversion of the outlook to neutral.

Fitch said it, “Expects the sector to maintain very strong capital in 2024. However, better underwriting margins could lead to greater capital repatriation if capital cannot be deployed to grow business at attractive margins.

“Renewed interest from institutional investors due to higher expected returns could lead to an influx of alternative capital to the sector, and Fitch expects the abundance of traditional and alternative capital to lead to a gradual softening of the reinsurance market from 2025.”