Fitch Ratings has revised its outlook on the global reinsurance sector from “improving” to “neutral,” suggesting the pricing cycle may have passed its peak.

However, the sector is expected to maintain strong profitability by historical standards through 2025, according to the agency’s latest report.

The report attributes the record profits achieved in 2023 and the first half of 2024 to favorable underwriting conditions, steady investment income, enhanced balance sheet flexibility through higher capital levels, and enhanced reserve adequacy.

These factors have provided a solid foundation for reinsurers to manage potential pressures, including lower rates, increased claims costs, and higher catastrophe losses.

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Fitch expects core margins to stabilize or decline slightly in 2025 compared to their peaks in 2023 and 2024. Despite the market becoming more competitive, with abundant capacity from conventional and alternative sources, reinsurers are expected to maintain discipline in underwriting.

While premiums are unlikely to rise further in 2025, any significant losses in the second half of 2024 could lead to upward price adjustments. The report also notes that capital levels are expected to remain strong, allowing for continued high levels of capital repatriation into 2025 while providing a cushion for any unexpected earnings volatility.

In terms of credit quality, Fitch reports that the majority of insurers’ financial strength ratings are in the ‘AA’ (very strong) and ‘A’ (strong) categories, reflecting strong capital positions, resilient earnings and robust business profiles. Lower ratings in the ‘BBB’ to ‘BB’ range are mostly concentrated in emerging markets, where the operating environment and sovereign risks are more pronounced.

During 2024, reinsurers saw rating affirmations and three upgrades, with no downgrades reported. Most reinsurers maintain stable outlooks, with the exception of Swiss Re, which holds an A+ rating with a positive outlook due to improved financial performance.

Several factors have been highlighted as potential challenges for the sector going forward. These include negative loss trends in casualty lines in the US amid rising social inflation and the potential for large and unexpected losses due to increasingly frequent and severe natural disasters, particularly secondary peril events.

The systemic nature of cyber risk also poses a challenge, as hedging and pricing strategies have yet to be tested in the event of a major cyber event. In addition, the industry may experience earnings volatility under IFRS 17, driven by changes in long-term economic and operating assumptions within the life and property and casualty insurance segments.

While the reinsurance market has started to decline, increased loss activity could slow or halt this trend, said Manuel Arivier (pictured above), a director at Fitch.

He added that further improvement in the sector’s strong credit fundamentals is less likely at this stage of the cycle, but noted that the sector remains in a stronger position than it was a year ago to deal with potentially less favorable market conditions.

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