Global reinsurance market in ‘good shape’, but beware casualty risks: S&P

Buoyed by improved pricing, structural changes, and strong capital positions, the global reinsurance sector is in “good shape”, making it better equipped to meet its cost of capital in 2024 and 2025. However, risks associated with US casualty, financial market volatility, and geopolitical tensions warrant close attention.

At the Monte Carlo Rendez-Vous de Septembre conference, a panel of S&P Global Ratings experts shared a cautiously optimistic outlook for the industry’s near-term future. 

“The sector is in good shape due to the structural changes, making it better prepared to meet its cost of capital compared to prior years,” said Johannes Bender of S&P Global. The industry is expected to achieve a combined ratio of 92 to 96 percent for 2024 and 2025, with return on equity (ROE) projected in the “low to mid-teens,” around 10 to 15 percent.

Rising interest rates are expected to boost net investment returns to between 3.5 and 4 percent. “The sector will benefit from rising interest rates in their portfolios,” Bender added. “This is certainly a strong statement from our side, as that hasn’t been the case for a long time.”

He cautioned that the sector’s performance will still depend on the level of cat losses in the remainder of the year. “It will be determined by actual losses, and that’s a space we carefully watch,” he noted.

S&P revealed on September 3 that it has retained its stable outlook for global reinsurers, driven by structural market changes and the sector exceeding its cost of capital in 2023 for the first time in four years. Improved pricing, particularly in short-term lines, and strengthened capitalisation has enhanced its ability to withstand market pressures.

“The sector benefits from a very rich capital position.”

“Pricing in these lines is peaking in 2024, after years of rate increases and the structural changes of 2023, including stricter and more favourable terms and conditions and risk repricing,” the agency said in its report.

“The sector benefits from a very rich capital position,” analysts said at the media conference, noting that reinsurers are now more diversified than they were a decade ago, giving them greater flexibility to manage a broader range of risks, from catastrophic events to market volatility. 

US casualty warning

Despite the positive overall outlook, analysts said the growing risks in US casualty lines, particularly in general liability, excess casualty, and professional indemnity, mean that “the reinsurance sector will continue to potentially have the necessity to strengthen the reserves”.

Several leading reinsurers, including Swiss Re, SCOR, Axis, Markel, and Everest, have been forced to strengthen reserves over the past 18 months to mitigate potential future losses.

S&P analysts warned of the long-term impacts these risks could have on earnings and capital. “US casualty risk could bleed into earnings and ultimately capital for many years,” Bender cautioned. Unlike natural catastrophe risks, which tend to be short-term events, casualty risks have the potential to create financial strain over extended periods.

“If history is any guide, we saw many companies in the early 2000s fail due to inadequate reserving or pricing in the casualty business,” he concluded.

For more news from the Rendez-Vous de Septembre (RVS) click here.

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