Rating agency Fitch has said the reinsurance market will soften again in 2025 with increasing capital levels globally and interest rising in reinsurance as an asset class, be that in insurance-linked securities (ILS) or other forms.
Of course, we’ve already witnessed a modicum of softening of property catastrophe reinsurance rates at the higher layers of towers, as competition from reinsurers looking to maximise the opportunity while rates are hard, as well as a buoyant catastrophe bond market pressured these upper levels of risk.
But, Fitch Ratings seems to be suggesting that, absent upheavals and major catastrophe losses, the reinsurance market could soften more meaningfully in 2025, as appetites and growth of market capital increase.
This was echoed by its rival Moody’s, who said the reinsurance market is expected to remain firm, in terms of its pricing, at the next sets of major reinsurance renewals in 2024.
But Fitch Ratings believes underwriting profitability may now have peaked, for the current hard market cycle, meaning the only way to go is likely slightly down, if capital continues to build-up in the sector.
“Fitch Ratings expects underwriting margins of rated reinsurers globally to peak in 2024, and market conditions to start to soften in 2025, as rising risk appetite and strong returns will increasingly attract additional capital from traditional reinsurers and institutional investors,” the rating agency said.
Available capital, across traditional reinsurers and alternative capital or ILS, increased by double-digits in 2023 and this on top of earnings from an expected second year of strong underwriting profits in 2024, are likely to build sector capital further.
Robert Mazzuoli, CFA, Fitch Ratings further states, “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.”
This is, of course, very good news for reinsurance buyers and as we reported recently there is evidence of broadening appetites at reinsurers and ILS funds, with some aggregate and lower-layer capacity becoming more available, albeit only at the right terms and price.
Fitch also said it expects, “The supply and demand dynamics will start to move in favour of cedents again, despite continuous high demand for reinsurance protection.”
As a result of the continued expectation for higher reinsurer margins and returns for investors in reinsurance, Fitch said that it is “maintaining its improving fundamental sector outlook.”
Of course, a lot can be happy throughout 2024, with plenty of uncertainty in the geopolitical environment and the capital markets economy, which can play into available capital for the sector.
The occurrence of any major catastrophe loss events, or simply another costly year of aggregated cat losses, will also play into the reinsurer and ILS manager’s willingness to allow any softening of pricing be meaningful. Minimum return on capital targets have certainly risen and this could serve to sustain higher pricing levels for longer in reinsurance.
In addition, inflationary effects continue to ramp up loss costs for re/insurers and ILS managers, when events occur, which means demand is also likely to increase further.
So, the market will need to get much further through 2024, before any more certain forecast for reinsurance rates in 2025 can be given.
Some softening appears inevitable, at least at certain levels of reinsurance towers, lines of business and structures, but a more meaningful return to sustained softening is still very uncertain, even with growing industry capital levels.
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