Reinsurer returns to remain strong through 2026: Guy Carpenter

With an expected return on equity (ROE) of 17.3% for 2024, reinsurers are projected to remain strong through 2026, with the annual ROE forecasted to consistently exceed the cost of equity, according to data from Guy Carpenter, the reinsurance broking arm of Marsh McLennan.

As you can see from the fluctuations in Guy Carpenters’ chart, the reinsurance market experienced significant challenges and shifts from 2017 to 2023, driven by escalating natural catastrophe losses, increased inflation, and an evolving risk landscape.

Last year, the ROE peaked at 21.9% against a cost of equity of 10.6%, and is expected to fall to 17.3% this year, which is still strong. The ROE is expected to fall in both 2025 and 2026, as is the cost of equity, but remain very healthy, suggesting continued strong returns for reinsurers.

Major hurricanes, severe convective storms, wildfires, and floods led to substantial claims in recent years, straining reinsurers’ profitability and prompting tighter underwriting standards and adjustments to terms and conditions, including notably higher attachment points.

Thus, the market has seen a notable hardening trend since the start of 2023, with rising premium rates as reinsurers looked to restore margins, while reinsurers’ share of losses from so-called secondary perils has fallen as primary insurers retain more of the risk.

According to a report from AM Best, reinsurers met their cost of capital for the first time in four years in 2023 amid a rebound in capital gains and underwriting profits driven by the aforementioned factors.

“The hardened market has led to more sustainable pricing momentum, enhancing reinsurers’ ability to meet their cost of capital over the medium term,” the rating agency said at the time.

Speaking with Reinsurance News at the 66th Rendez-Vous de Septembre (RVS) in Monte Carlo this year, EY executives highlighted reasons for optimism in the reinsurance industry, citing a “turning point” driven by hardening rates that have boosted profitability.

Despite this, they noted some headwinds going into 2025, particularly around whether pricing will continue to increase at the same pace.

However, following large industry losses stemming from major hurricanes Milton and Helene, many analysts now foresee a more stable environment for the sector in 2025, though further hardening is not widely expected.

A recent report from JP Morgan observed, “In reinsurance, the market is expected to stabilise with pricing likely to see minor declines in 2025 which would still leave pricing at healthy levels.

“Our base case is for pricing to return to around 2023 levels, which was a year where the reinsurers produced strong margins. More importantly, we expect terms and conditions to remain firm, with the higher attachment points achieved in 2023/24 expected to hold, which should support profitability.”

This aligns with the data provided by Guy Carpenter, which foresees a steady decline in return on equity for the industry in the next few years.

Nonetheless, returns are expected to remain above the cost of equity and exhibit significantly less turbulence than in recent years.

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