Reinsurance sector to remain profitable through 2025

The sector achieved record profits in 2023 and the first half of 2024, said Fitch Ratings.

The global reinsurance sector’s solid profitability is expected to remain robust into 2025, despite the reinsurance pricing cycle likely having peaked, Fitch Ratings said.

The sector achieved record profits in 2023 and the first half of 2024, supported by the best underwriting conditions in over two decades, steady investment income, increased capital buffers, and improved reserve adequacy. 

These factors provide a solid foundation to handle potential pressures from declining prices, rising claims costs, and high catastrophe losses. 

Underlying margins are expected to stabilise or slightly decline in 2025 from their peak levels due to a more competitive market and ample capacity from both traditional and alternative sources. 

Further premium rate increases are unlikely unless significant loss activity occurs in the second half of 2024. Capitalisation is projected to remain strong, allowing high levels of capital repatriation while providing room to absorb any unexpected earnings volatility.

Supply and demand dynamics in property catastrophe reinsurance have returned to balance, with capital growing faster than demand. 

Fitch anticipates a slowdown in capacity increases, as new capital inflows are expected to remain subdued. Rising demand for P&C insurance, driven by higher insured values and climate risk awareness, supports growth in both life and health reinsurance. 

Economic growth in developed markets is projected at 1.4% per annum for 2024 to 2026, further boosting demand from primary insurers and reinsurers.

Market conditions are anticipated to be more competitive in 2025, leading to a moderate softening, particularly in property catastrophe reinsurance, unless significant losses occur in late 2024.

Property rates may face downward pressure, but risk-adjusted returns should remain attractive. Casualty pricing is expected to rise due to increased risk concerns in the US. Despite increased competition, reinsurers are likely to maintain underwriting discipline and strict terms.

Meanwhile, underwriting margins are expected to be flat or modestly lower in 2025, maintaining a strong sector return on equity of 15% to 20%. Pricing efforts from primary insurers on quota-share treaties should support margins, though substantial premium increases are unlikely as inflationary pressures ease. 

Property catastrophe losses in the first half of 2024 totalled $61b, 25% above the decadal average, primarily due to severe US storms. This trend is expected to persist, with reinsurers facing challenges in pricing and retrocession of catastrophe risk.

Casualty margins are likely to remain stable, with price increases matching rising loss costs. Life reinsurance margins are expected to remain stable, with mortality rates normalizing post-pandemic. Investment yields have been strong, but declining rates may gradually reduce margins. $25b to $695b in the first quarter of 2024.

P&C reserve buffers have been strengthened, improving balance-sheet resilience. However, challenges remain in projecting ultimate losses due to post-pandemic changes in claims frequency and inflation. 

Profitability in life and health reinsurance depends on the adequacy of past reserving assumptions for long-tail lines.