S&P: Global reinsurers to achieve ‘hard-earned’ cost of capital in 2024

Global reinsurers are expected to again earn their cost of capital in 2024 and 2025, but rates have peaked, according to S&P Global.  

At a pre-Monte Carlo in London briefing following the release of its annual reinsurance report, S&P said the sector had benefited from the rise in reinsurance pricing in 2023, which was “hard earned” after four years of failing to meet the cost of capital. 

“Despite signs of moderation in property pricing, we think overall conditions are still favourable, and we expect the industry will continue to post strong results with a combined ratio of 92 to 96 percent, including a catastrophe load of 8 to 10 percentage points and a return on equity (ROE) in the low to mid-teens in 2024–2025, barring any outsize catastrophe losses,” S&P said.  

“We also forecast the sector will benefit from rising investment income, with expected net investment yields of 3.5 to 4 percent in 2024–2025.”

The ratings agency said it expected pricing to remain broadly in line with rates in 2023 and the first half of 2024, although there had been some weakening in property, offset by increases in casualty. 

“Reinsurance pricing is still largely favourable in short tail lines, although 2024 renewals started to show some decreases depending on the line of business, loss-free or loss-hit policy and region,” the agency said. 

“The moderate downward pressure on rates can in part be attributed to broad increased capacity of reinsurers, which benefited from strong results in 2023 and their subsequent increase in appetite. 

“Casualty is unique in that it saw upward pressure in pricing given the industry’s eye on adverse reserve developments on certain casualty lines from the problematic years, particularly 2014–2019.” 

“Reinsurers have held firm to their 2023 structural changes.” S&P Global

The report, “Global Reinsurers Must Maintain Discipline To Cement Strong Performance Amid Casualty Risks”, said: “The favourable pricing in property-catastrophe business and strong operating earnings in 2023 and the first half of 2024 brought back risk appetite in the segment during this year’s renewals, although not too long ago, some reinsurers were exiting this line altogether. And while they gave some ground in the midyear renewals, reinsurers have held firm to their 2023 structural changes, maintaining high attachment points with limited appetite for aggregate covers.

“However, reinsurers will need to remain disciplined in their underwriting as climate change, urbanisation, inflation, and increased property exposures, specifically in catastrophe-prone regions, continue to evolve.”

“Reserving by reinsurers on adverse casualty claims was welcome.” Ali Karakayu

Outlook stays at ‘stable’

S&P analyst Ali Karakayu said reinsurers’ returns would be boosted by strong investment returns, with increases in casualty reserves for prior year adverse developments being offset by improved investment returns on the same reserves. 

He said reserving by reinsurers on adverse casualty claims was welcome   

He added that the agency’s discussions with C-suite level executives in reinsurers revealed they were facing increased demands from primary insurers for lower prices and attachment points, but were determined to defend the rate increases and higher attachment points achieved in 2023. 

Karakayu said any downward movement on attachment points would be monitored closely by S&P as it could signal a return to previous practices with increased losses being sustained by reinsurers. 

“To reverse that would be a huge decision by the reinsurers,” he said. 

He said the fall in the economic inflation rate made rising prices less of a concern for the industry, but it was still a worry for the casualty segment where it could take five or six years to settle claims. 

Karakayu said there had been “intense” debate within S&P over whether to increase the outlook for the reinsurance industry from stable to positive. The agency had decided to keep the outlook at stable because of concerns over casualty lines. 

On where he thought pricing would go in the January renewals, Karakayu said S&P’s basic assumption was that reinsurers would defend rates and attachment points. 

He said S&P would closely monitor attachment points because of the risk of exposure to so-called secondary perils which have caused high claims for insurers. 

Charles-Marie Delpuech, S&P’s EMEA insurance analyst, said reinsurers’ budgets for property-catastrophe losses had exceeded actual losses in 2023 for the first time since 2019. The 19 top reinsurers set aside $17.1 billion compared to actual losses of $10.1 billion. In 2024, reinsurers had increased their catastrophe budgets to $19.2 billion. 

Maren Josefs, an S&P EMEA insurance analyst who focuses on insurance-linked securities, said alternative capital had seen significant growth, with new issuances of $13 billion at the half year point. 

“That used to be the full year amount, so the industry is on track for a record year,” she said.

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