Reinsurance market participants are divided on whether price increases at the key January 1st renewals will be strong enough to properly account for increasing loss trends in the property catastrophe space, although Fitch Ratings expects reinsurers to maintain their strong profitability in this line of business.
The global rating agency has released the results of its reinsurance market survey, which saw 81 reinsurers, insurers, brokers, and other market participants provide their expectations for the January 2025 reinsurance renewals.
More than 50% of respondents expect global reinsurers to raise prices at 1.1, with 30% expecting increases of more than 5%, and 26% predicting price rises of less than 5%. Some 22% of respondents expect pricing to be flat, 12% see price reductions of less than 5%, and 10% see price cuts of more than 5%.
Fitch feels the same as those that expect prices to fall. The rating agency has said previously that it believes the cycle has passed its peak, and ultimately foresees a softer reinsurance market in 2025 amid an abundance of capital.
On property cat specifically, survey respondents are divided on the outlook for the Jan renewals, with 39% stating that price rises in this line would be sufficient to compensate for increasing loss trends, 36% saying they wouldn’t, and 25% being unsure.
“Fitch believes reinsurers are well positioned to maintain their strong property-catastrophe profitability, even with prices easing, and expects underlying margins to remain close to their 2023–2024 peak in 2025. Capital buffers and reserve adequacy have strengthened, helped by record profits in 2023 and 1H24, and we expect reinsurers to maintain their underwriting discipline,” says the rating agency.
As we heard from our discussions at RVS 2024, the annual meeting of the reinsurance industry in Monaco in early September, reinsurers are poised to maintain the structural changes achieved in recent times, and appear unwilling to increase any exposure to secondary perils, which continue to drive annual insured losses.
Fitch’s survey also asked which lines of business will offer the most attractive margins at the 1.1 renewals, and again, respondents were split. 25% said property, 21% property cat, 20% specialty/other, 18% motor, and 16% casualty.
Casualty Reinsurance: A Market in Flux
Casualty being the lease popular in unsurprising given the adverse development on prior years reported by some during H1 2024 earnings season, and Fitch expects reinsurers to push for double-digit increases in US casualty rates at renewals, and also to cut cover and quota-share commissions.
The challenges facing the US casualty reinsurance market are complex and multifaceted. The surge in social inflation and litigation costs is driving significant loss trends, putting pressure on reinsurers to adjust their pricing and risk appetite.
The situation is not entirely bleak, however, and reinsurers are taking steps to manage the risk and maintain profitability. They are demanding more granular information from cedants and tightening their risk selection criteria.
While Fitch anticipates that reserve weaknesses won’t affect capital to the same extent as in the late 1990s and early 2000s, the rating agency has downgraded its reinsurance outlook from “improving” to “neutral.”
In addition to demanding higher rates, reinsurers are also seeking to reduce cover limits and quota share commissions to further mitigate their exposure. The move towards stricter terms and conditions is a reflection of the reinsurers’ desire to exercise more control over their risk appetite in a challenging market.
Navigating a Softer Market
Despite the anticipated rate increases, Fitch expects the overall reinsurance market to soften in 2025. The abundance of capital and the ongoing competition for business are factors that are likely to contribute to a more moderate pricing environment.
Despite the challenges, the reinsurance market is adapting. Reinsurers are showing their resolve to maintain discipline and strong profitability, even as they navigate the complexities of social inflation, litigation costs, and the growing impact of climate change. The January 1 renewals are expected to be a key turning point, as the market continues to adjust to these evolving dynamics.
The January 1 Renewals: A Test of Strength
The January 1st renewals will be a crucial test for the reinsurance market. The outcome will determine whether reinsurers can secure adequate pricing to cover their increasing loss exposures. It will also provide insights into the market’s overall resilience in the face of evolving risks.
The future of the reinsurance market depends on the ability of reinsurers to adapt to these changing dynamics. As the market continues to evolve, we can expect to see further adjustments in pricing, risk appetite, and underwriting practices.
It looks like it could be a challenging and potentially late January 2025 renewals for some, and it will interesting to see where supply meets demand in the property cat space and beyond, as reinsurers look to maintain the discipline and strong profitability achieved over the past 18 months or so, and buyers work to mitigate losses from secondary perils against the uncertain backdrop of climate change.
