S&P expects reinsurers to produce strong results in 2024-2025 amid still-favourable pricing

S&P Global Ratings, a provider of credit ratings, research, and risk analysis, has provided a comprehensive review of the global reinsurance sector, forecasting promising earnings for the industry over the next couple of years.

The report outlines a stable outlook for the reinsurance sector, citing strong operational performance and robust capitalisation, despite the looming challenges posed by natural catastrophes, economic pressures, and volatility in financial markets.

Reinsurers are expected to continue generating strong operating profits, with earnings surpassing their cost of capital in 2024 and 2025.

According to S&P’s analysis, reinsurers’ capitalisation remained resilient through 2023, with their aggregate capital adequacy remaining robust at the 99.99% confidence level. This solid capital base is projected to persist into 2024, offering a cushion against potential stressors.

With favourable reinsurance pricing, particularly in short-tail lines, strong underwriting discipline, and increasing demand for reinsurance, the outlook remains positive.

However, S&P Global Ratings highlights several key headwinds that could impact the reinsurance sector’s stability. The global increase in insured losses due to natural catastrophes, driven by inflation, urbanisation, and climate change, poses a significant challenge.

In addition, the report points to inflationary concerns, particularly in the US casualty lines, where adverse loss cost trends could affect the profitability of reinsurers. The ongoing volatility in financial markets and geopolitical tensions also remain potential risks to the sector, alongside a relatively high cost of capital.

The ratings agency reports that reinsurers have posted strong results, with a combined ratio of 91.5% in 2023, marking a significant improvement from the previous four-year average of 99.5%.

This positive trend has continued into 2024, with reinsurers maintaining a low to mid-90s combined ratio in the first nine months of the year. S&P’s forecast predicts that reinsurers will continue to benefit from favourable pricing in short-tail lines, though risks related to natural catastrophe losses and adverse developments in US casualty lines could dampen overall returns.

S&P also notes that while the reinsurance market has generally remained orderly during the 2025 renewals, with ample capacity, pricing pressures have emerged, particularly in specialty and short-tail lines. The US casualty sector experienced smooth renewals, though continued focus on pricing adequacy will be critical, especially as reserve adequacy remains under scrutiny.

On the topic of capital, S&P Global Ratings emphasises that reinsurers enter 2025 with strong financial foundations, benefiting from structural changes that have improved capital adequacy.

The use of alternative capital, particularly in property catastrophe reinsurance, continues to play a significant role in filling gaps left by traditional capital. The report also mentions the heightened competition from alternative capital sources, which have driven up capital levels across the reinsurance industry.

While global insured natural catastrophe losses remain a critical concern, S&P notes that reinsurers are well-positioned to absorb these losses. In particular, losses from severe convective storms (SCS) in 2023, which accounted for 60% of global insured losses, primarily affected primary insurers. However, reinsurance exposure to these losses was limited, thanks to the sector’s structural improvements over the past few years.

As for the future of life reinsurance, S&P Global Ratings highlights a continued recovery of earnings since the impacts of COVID-19 in 2020 and 2021. While competition remains stable, driven by high barriers to entry and the lack of price sensitivity compared to property/casualty reinsurance, the market continues to be highly sensitive to changes in assumptions and underwriting risk controls.

S&P Global Ratings remains cautiously optimistic for the global reinsurance sector, forecasting strong results in the coming years, though not without challenges. With a strong capital foundation, disciplined underwriting practices, and increasing demand for reinsurance, the sector is expected to navigate emerging risks and maintain its positive trajectory throughout 2024 and 2025.

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