Fitch has revised its outlook for the reinsurance sector from improving to neutral

The ratings agency said reinsurers’ profits should be resilient in 2025.  

The reinsurance hard market has peaked and is now plateauing, but the sector should continue to produce solid results through 2025, according to ratings agency Fitch.  

Fitch revised its outlook for the reinsurance sector from improving to neutral, saying it did not expect rates to improve further after big increases in 2023 and early 2024. 

The ratings agency said it expects the sector to remain resilient next year, with rising capital, strengthened reserves and steady investment income offsetting softening in prices from multi-year highs, rising claims costs and high catastrophe losses. 

“Fitch believes the reinsurance market has started softening, but heightened loss activity could slow or stop this trend,” said director Manuel Arrivé at a pre-Monte Carlo media briefing in London on September 5. “Further improvements in the strong credit fundamentals are less likely at this point of the cycle. 

“Downside risks remain elevated, but we believe the sector is in an even stronger position than a year ago and will defend itself against potentially less favourable market conditions.” 

Fitch said in a report titled “Global Reinsurance Outlook 2025” that it expected underlying margins to stabilise or decline slightly in 2025 after jumping in 2023, but predicted reinsurers would maintain underwriting discipline, bolstered by “ample capacity from traditional and alternative sources”. 

“The sector is in very good shape with strong capitalisation.”

Rate increases were unlikely unless there were significant losses in the second half of 2024. 

Fitch said the neutral stand means the drivers of the hard market had stabilised at a higher level. 

“The sector is in very good shape with strong capitalisation and earnings,” Arrivé said. “We expect it to remain resilient, but further improvement is less likely. 

“The cycle has passed its peak, but we expect it to remain broadly favourable. Downside risks are elevated, but the sector is strong enough to withstand it.” 

Arrivé said Fitch, which has not issued any reinsurance company rating downgrades since 2022, believed favourable reserve developments supported capital and revenue growth should remain steady due to structural demand for reinsurance. 

Capacity was growing faster than demand, especially in catastrophe reinsurance and this was keeping prices in equilibrium. 

Reinsurance companies enjoyed strong investment income from the hikes in interest rates last year, but Arrivé said Fitch expected them to have reaped most of the benefits by the end of the year. 

“Interest rates on new money investments still exceed the rate on maturing bonds in most instances, but a shift to declining rates across most jurisdictions would gradually reduce the margin,” the agency’s report added. 

Gradual softening in property

On rates, Arrivé said price easing had become “more visible” in the mid-year renewals, with property rates flat to down for property unaffected by catastrophes and flat for those hit with catastrophe losses. 

“The base case is for a moderate and gradual softening in property-catastrophe, but this is sustainable,” he said. 

He said reinsurers appeared to be more open to discussing price changes than they were for changing structures or attachment points, adding the market could harden further if there was a high magnitude event before the end of the year. 

Hurricane forecasters have predicted a hyperactive Atlantic hurricane season, but so far it has been relatively quiet, with two category 1 hurricanes making landfall in the US causing moderate damage and one hurricane hitting Bermuda but causing relatively little damage. 

On casualty, where companies have been struggling with adverse developments from earlier years, Arrivé said rates were rising and should keep pace with rising costs from social inflation and “nuclear verdicts”. 

Overall, margins were expected to narrow, with reinsurers’ combined ratios edging up to around 90 percent from 87 percent in 2023.  

Overall return on equity was likely to remain at 20 percent—a far cry from the 5 percent earned in 2022. 

Arrivé said natural catastrophes had cost the insurance industry $60 billion in the first half of 2024, but these had largely come because of secondary perils such as severe convective storms, floods in Europe and hail in the United Arab Emirates and Italy. 

These had largely been borne by insurance carriers as reinsurers had reduced exposures, imposed higher attachment points and moved away from aggregate covers. He said this was likely to persist in 2024. 

Annual catastrophe losses of $100 to $150 million a year were the “new normal” and pricing of natural catastrophe risk remained a key challenge for re/insurers due to the complexities of climate change. 

On casualty, he said Fitch was being “very watchful” of reserving, which could weaken the capitalisation of some companies. 

Reinsurers remained “very cautious” about US casualty and would cut exposure if they were unable to get the prices they needed, he added. 

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