Reinsurers urged to discipline performance amidst casualty risks

Combined ratio forecasted to remain between 92% and 96% in 2024 to 2025. 

The global reinsurance industry retrieved its cost of capital last year for the first time in four years, S&P Global Ratings said. It is also expected to continue this pace in 2024 to 2025.

Last year’s profitability was supported by strong pricing in property and property catastrophe lines, along with favourable investment income. As reinsurers navigate through 2024, pricing in these lines is starting to plateau, yet the industry's fundamentals remain favorable.

Reinsurers benefited from substantial pricing power, especially in short-tail lines, as well as from the structural changes implemented in 2023. 

These changes included stricter terms and conditions and risk repricing, which have fortified the sector's resilience. As a result, reinsurers' capital positions have improved, bolstered by strong earnings and recovering asset values. This has, in turn, increased their risk appetite, allowing them to explore more opportunities.

Despite these positive dynamics, the industry is not without challenges. 

Casualty reserves pose a significant risk, particularly in the US markets where some reinsurers have reported adverse developments in casualty lines such as general liability, excess casualty, and professional indemnity. 

These issues stem from the problematic underwriting years of 2014-2019, highlighting the long-tail nature of casualty risks and the potential for future volatility.

Property reinsurance pricing and market dynamics

Property reinsurance pricing, which peaked in 2023, is beginning to moderate as of the midyear renewals in 2024. 

However, the overall conditions remain favourable. The reinsurance sector continues to see strong demand, with reinsurers capitalizing on the available pricing opportunities. 

The industry's combined ratio, which was 91.5% in 2023, reflects this strength, and similar performance is expected to continue in 2024, barring any significant catastrophe losses.

The capital strength of the industry, reinforced by record earnings and the unwinding of unrealised losses, allows reinsurers to write more business and provides a buffer against potential large-scale losses. This capital adequacy is crucial for maintaining the sector's stability, particularly as alternative capital, such as catastrophe bonds, continues to play an important role in the market.

Long-term outlook and emerging risks

Looking ahead, the global reinsurance sector is expected to maintain its strong performance, with a combined ratio forecasted to remain between 92% and 96% in 2024 to 2025. 

However, the industry must remain vigilant in managing emerging risks, particularly in casualty lines, where the impact of social inflation and long-tail risks could challenge profitability.

Life reinsurance, a smaller yet significant segment of the market, has also seen a recovery to pre-pandemic levels. 

The sector's return on equity improved markedly in 2023, driven by strong performance in mortality, morbidity, and longevity lines. However, the life reinsurance sector remains sensitive to assumption changes, highlighting the need for careful risk management.