Reinsurance capacity strong despite rising cats and adverse casualty trends: S&P

Bolstered capital from strong earnings in 2024 led to ample capacity and strong reinsurer capital positions, contributing to a more orderly renewal season despite ongoing challenges from natural catastrophes and adverse casualty trends, according to a recent S&P report.

“The January 1, 2025, reinsurance renewals marked a return to normalcy after challenging conditions two years ago. Back then, a dramatic increase in property and property catastrophe (short-tail lines) reinsurance pricing, driven by years of underperformance, led to a frantic and disorderly market renewal,” analysts stated.

Adding: “In contrast, buoyed by two years of strong and favourable returns, reinsurers entered this year’s renewals with a greater willingness to deploy capacity.

“As a result, our view of the global reinsurance sector remains stable, reflecting forecast credit trends over the next 12 months, including the distribution of rating outlooks, existing sector-wide risks, and emerging risks.”

According to the report, reinsurance renewals for property and property catastrophe lines have experienced general downward pricing pressure, mainly driven by strong industry earnings and abundant capital.

Strong operating earnings expected for the full year 2024, primarily due to strong underwriting performance in short-tail lines, robust net investment income, and the recovery of asset values.

This positive outlook has significantly strengthened the industry’s capital position.

The casualty reinsurance market is also showing signs of stability, but concerns linger around reserve volatility.

S&P analysts said: “We believe unfavourable developments in casualty loss reserves remain a key risk to the reinsurance sector. As a result, we expect reinsurers’ casualty reserves will need to be closely monitored amid challenges from both economic inflation, although abating, and persistent social inflationary trends (increased litigation costs and higher jury awards–particularly in the U.S.–often referred to as ‘social inflation’).”

Reinsurers are expected to bear a meaningful portion of the costs related to the California wildfires, which are poised to become the largest insured wildfire event in history, with loss estimates of $20 billion-$50 billion.

The report anticipates that these losses will originate mainly from personal lines (about 80%-85% of the total insured losses) rather than commercial lines (about 15%-20%).

Looking ahead, S&P Global Ratings maintains a stable outlook for the global reinsurance sector, predicting strong results despite nat cat losses.

Analysts concluded: “We believe reinsurers are entering 2025 from a position of capital strength and will post strong results this year, despite early losses associated with the California wildfires. These will be absorbed within industry players’ annual earnings, albeit leaving less catastrophe budget for the remainder of 2025.

“In our view, pricing in short-tail lines will remain firm through the remaining renewals this year. Meanwhile, reinsurers will continue to grapple with the new normal of elevated natural catastrophes and the effects of inflation on casualty loss reserves, which remain at the forefront of industry concerns.”

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