Global reinsurance sector poised for stability through 2025 – S&P

Strong profits and capitalization support a stable outlook

Global reinsurance sector poised for stability through 2025 – S&P

Reinsurance

By Kenneth Araullo

The global reinsurance sector is projected to remain stable in 2024 and 2025, supported by strong operating profits and robust capitalization levels, according to a recent report from S&P.

Reinsurers are expected to earn their cost of capital over the next two years, benefiting from favorable pricing, disciplined underwriting, and strong investment income driven by high bond yields.

S&P Global noted that the sector's capitalization was redundant at the 99.99% confidence level at the end of 2023, providing a buffer against potential financial stresses. The report also highlighted increasing demand for reinsurance, particularly in short-tail lines, which has contributed to sustained pricing levels.

However, the sector continues to face significant challenges, including elevated insured losses from natural catastrophes, economic and social inflation, and geopolitical uncertainties. These factors, alongside the high cost of capital, could impact profitability despite the overall stability projected for the market.

The global reinsurance industry posted a combined ratio of 91.5% in 2023, an improvement compared to the previous four-year average of 99.5%. The trend continued through the first three quarters of 2024, with GAAP filers maintaining combined ratios in the low 90s and IFRS 17 undiscounted combined ratios remaining in the low to mid-90s.

S&P Global expects reinsurers to continue generating strong results in 2024 and 2025, particularly in short-tailed lines where pricing remains favorable. However, challenges such as catastrophe losses and adverse reserve developments in certain US casualty lines remain key risks.

Reinsurers were able to earn their cost of capital in 2023 for the first time since 2019, driven by improved pricing structures and higher investment income. This trend is projected to continue into 2024 and 2025, though returns are expected to decline from their peak due to pricing pressure and reserve adequacy concerns in certain casualty lines.

Reinsurance pricing and market trends

The 2025 renewal period was largely orderly, with ample capacity available in the market. While specialty and short-tail reinsurance lines saw pricing pressure at the start of the year, US casualty renewals were smooth.

However, pricing on casualty business remains under scrutiny, as reserve adequacy remains a concern for underwriting years with weaker performance.

S&P Global reported that global property catastrophe reinsurance pricing has softened from its peak, though it remains at favorable levels. The decline is linked to an increase in available reinsurance capital, leading to greater deployment capacity. Reinsurers have also exhibited more flexibility in terms and conditions, including coverage limits.

Insured losses from natural catastrophes surpassed US$100 billion for the fifth consecutive year, reaching US$145 billion in 2024. While reinsurers have implemented structural adjustments to lower exposure to high-frequency events, catastrophe risks remain a critical factor influencing the sector.

Wildfires in California, including the Palisades and Eaton fires in Los Angeles, resulted in insured losses estimated between US$20 billion and US$40 billion, with some projections as high as US$50 billion. Reinsurers are expected to absorb a significant portion of these costs, particularly through personal lines coverage rather than commercial policies.

The allocation of losses between insurers and reinsurers will depend on policy terms, retention levels, and assessments from the California Fair Plan.

Despite these early-year losses, S&P Global indicated that reinsurers are entering 2025 with strong capital positions. However, these wildfire losses could reduce the industry's catastrophe budget for the remainder of the year.

Severe convective storms (SCS) were the primary driver of global catastrophe losses in 2023, accounting for US$64 billion in insured losses, or 60% of total natural catastrophe claims. The majority of these losses – approximately 84% – originated in the US, with hail damage representing between 50% and 80% of the total impact.

Unlike in previous years, primary insurers bore a larger share of natural catastrophe losses in 2023, as most severe convective storms did not trigger reinsurance coverage thresholds. This trend largely persisted into 2024, reinforcing structural shifts in the market.

Global reinsurance capital reached record levels in 2024, driven by retained earnings and strong catastrophe bond issuance. Alternative capital remains a significant component of the property catastrophe market, with expectations for further growth as it fills gaps left by traditional capital sources.

S&P Global noted that capital adequacy in the sector remained robust at year-end 2023, bolstered by strong earnings, a reduction in unrealized losses on fixed-income securities, and the implementation of a new capital model. The firm expects underwriting and investment income to continue supporting capital adequacy through 2024 and 2025.

The life reinsurance sector has continued its earnings recovery following the impact of the COVID-19 pandemic in 2020 and 2021. However, S&P Global emphasized that the sector remains highly sensitive to assumption changes, requiring careful management of underwriting risks.

Despite ongoing market stability, competition within the life reinsurance space is expected to remain relatively unchanged. High barriers to entry and limited price sensitivity, compared with property and casualty reinsurance, contribute to a steady market structure.

Unlike in the P&C sector, mergers, acquisitions, and alternative capital have not played a transformative role in life reinsurance.

What are your thoughts on this story? Please feel free to share your comments below.

Keep up with the latest news and events

Join our mailing list, it’s free!