Reinsurers’ underwriting margins are expected to peak in 2024 on the significant price rises and tighter terms and conditions achieved during 2023 and in the January 2024 renewals, which will likely lead to softer market conditions in 2025, according to a report from Fitch Ratings.

Strong returns and rising risk appetite will increasingly attract additional capital from traditional reinsurers and alternative capital providers, said the report titled “Reinsurers Defend New Business Margins at January 2024 Renewals.”

“We expect reinsurance capacity to rise in 2024, prompting softer market conditions in 2025,” said Robert Mazzuoli, director, Fitch Ratings, in a comment accompanying the report.

“As a consequence, the supply and demand dynamics will start to move in favor of cedents again, despite a continuous high demand for reinsurance protection,” the report continued.

Most lines of business saw price increases of 5-10 percent during the January 2024 renewals, but premium hikes broadly followed claims inflation patterns, Fitch said, explaining that only loss-affected lines of business and regions experienced significant price hikes during this year’s January renewals.

“Terms and conditions such as limits, attachment points or exclusions were broadly unchanged.”

The report said that traditional reinsurers and institutional investors again increased their risk appetite for higher layers of property catastrophe covers, which was a reversal from their approach from a year ago when there was a lack of capacity and strong pressure to raise prices in the reinsurance and retro markets.

Rising Capital Levels

“Strong earnings generation, the stabilization of financial markets and major reinsurers’ move to the accounting standard IFRS 17 led to a strong recovery in reinsurance capital in 2023,” the report said.

Fitch expects reinsurance capital to have grown 11 percent to around $535 billion by year-end 2023, which partially reverses losses seen in 2022. In addition, alternative capital was expected to have grown by 13 percent in 2023, to around $105 billion, as a result of the record numbers of catastrophe bonds issued in 2023.

Fitch attributed this growth to “very attractive returns on the back of the absence of large loss events, attractive pricing and a strong investment return on collateral pools.”

Indeed, the ratings agency said, the property-catastrophe market was able to attract capital from reinsurers and institutional investors given the very strong returns seen in 2023 (as a result of the absence of large-scale hurricanes in the U.S.).

“The rise in available capital supports our view of increasing reinsurance capacity in 2024,” said Fitch, which also forecasts an improvement in underlying profitability for the global reinsurance sector in 2024.

Natural Catastrophe Claims

Despite the absence of any large-scale U.S. hurricane events in 2023, insured natural catastrophe claims reached $100 billion, which is 23 percent above the 10-year average, said Fitch, quoting Swiss Re.

Fitch noted that the protection gap between total economic losses and insured losses remained large as the insurance and reinsurance industry covered only around 40 percent of economic losses.

“We expect the increase in value of insured goods on the back of still-noticeable inflation and wealth creation, and climate change, will continue to drive weather-related natural catastrophe claims higher. We believe this underpins demand for re/insurance protection.”

Cedents Take Higher Share of Claims

The report explained that ceding companies carried a higher share of natural catastrophe claims in 2023 than in prior years for two reasons:

1. There was a higher number of secondary peril events in 2023, which caused insured claims of below $10 billion each, but there was no primary peril event.
2. Higher retention rates and the lack of aggregate covers meant that a larger share of the claims caused by secondary peril events remained on cedents’ balance sheets.

Sector Outlook Maintained

Fitch forecasts an improvement in underlying profitability for the global reinsurance sector in 2024 on continued strong underwriting margins and rising investment income, which will continue to bolster earnings. As a result, Fitch is maintaining its improving fundamental sector outlook.

Other findings from the Fitch report include:

• Casualty reinsurers did not succeed in pushing through more significant price increases following under-reserving for older underwriting years and concerns about social inflation. Casualty renewals saw nominal price increases of 5-10 percent, in line with claims inflation.
• Cyber was the only casualty line that had “significant price decline on higher supply.”
• Property market prices increased by 5-10 percent for loss-free programs in must regions, which broadly matched claims inflation.
• Aggregate covers and low layers of property cat covers remained close to non-existent at the January 2024 renewals, forcing cedents to look for alternative solutions to protect earnings.
• Specialty remained an attractive market for reinsurers, which provided ample capacity for most lines and regions. However, those lines affected by the geopolitical conflicts in Russia/Ukraine, and in Gaza, such as war on land, political violence and terrorism, were the most complex to reinsure.