Last week, Fitch Ratings revised its outlook for the global reinsurance sector from “improved” to “neutral.” So what’s behind the revision?

In a briefing on the “Global Economic Outlook 2025” at RVS in Monte Carlo, Director Manuel Arrivé (pictured left) said the rating agency expects sector trends and key credit drivers to remain broadly stable over the next 12 months. The sector is very well capitalized and financially sound, by historical standards, he said. Fitch expects balance sheets and profitability to remain resilient in 2025. However, “further improvements in fundamentals from this point are less likely.”

“We think the cycle has likely passed its peak, but market conditions should remain broadly favorable and supportive of strong returns,” he said. “Yes, there are still elevated downside risks, but we believe reinsurers are in a stronger position than last year to weather any major shocks.”

What’s behind Fitch’s decision?

According to Arefe, a mix of positive, neutral and negative credit factors have broadly offset each other to underscore the sector’s resilient profitability. On the positive side, Fitch expects markets to remain disciplined with pricing adequacy and tight terms and conditions holding firm despite increased competitive pressures. “The sector is very well capitalized, which has improved further over the past 12-18 months, and reserve adequacy is also generally strong, with favourable developments across most business lines.”

Capital and reserves provide protection against unexpected fluctuations in earnings, he said. Meanwhile, investment income should continue to benefit from high reinvestment yields, and revenue growth should continue steadily, supported by growing demand for property and casualty, life and health, and, most importantly, specialty lines.

On the neutral factors affecting the sector, Areva highlighted the fairly balanced dynamics between supply and demand. He said capital is growing faster than demand, which has filled the gap in real estate capital, for example, and this has a stabilising effect on prices. “Then you have the macro factors first, economic growth, which is muted but stable. This continues to support demand for primary insurance companies.”

On the interest rate environment, he noted that interest rates are neutral at this point, and Fitch believes that companies will realize most of the benefits of higher interest rates by the end of 2024 – with rates likely to decline from there. However, this decline should be gradual and moderate, and companies are well prepared to mitigate the impact, particularly on solvency. “Inflation continues to moderate, but the biggest unknown remains political and geopolitical risks.”

On the downside, Areva noted that the market is experiencing a moderate downturn, with risk-adjusted prices falling from multi-year highs due to intense competition, but this has been mitigated by disciplined underwriting. On the other hand, he said, claims costs continue to rise, primarily due to lower natural interest rates – due to climate change – and losses in the US – due to social inflation.

Reinsurance Renewals – Pricing Negotiations vs Structures

On renewals, he confirmed that in January, there were only moderate rate increases across most lines, a significant moderation compared to the large double-digit increases we saw in 2023. Rate relief then became more pronounced in April and July. The main takeaway from these renewal periods was that property rates were flat to modestly down for non-catastrophic loss companies and rose only slightly for loss companies. In loss lines, rates were in line with previous renewals, with rate increases of up to 50% for loss accounts and up to 10% for loss-free lines.

“Looking ahead, in the case of real estate, our base case is for moderate and gradual rate relief. But rates should remain appropriate and, importantly, the tighter terms and conditions that were agreed in 2023 should continue,” he said. “So, of course, reinsurers would like rates to remain higher for longer, but they seem more open to negotiating rates rather than structures, because at the moment, the structures are moving towards good profitability.

“We believe that the favorable market conditions will not end abruptly, even if the loss experience remains benign for the rest of 2024. However, the market remains tense and any unexpected and large-scale event that occurs in the second half of the year could prolong the difficult market for a longer period. In losses, we believe that prices will continue to vary along certain lines, but with a focus on losses in the US, price increases should keep pace with the rising loss costs caused by social inflation.

Fitch Forecast 2024-25

Giving his view on what the key findings of Fitch’s 2024 and 2025 Reinsurance Outlook mean for reinsurers, Graham Coates, Senior Director (pictured right), said the rating agency expects premium growth to continue, overall, but at single-digit levels. “We believe that pricing adequacy has been achieved, but we expect market discipline to continue. We expect reserve development to decline, but to remain favourable, and the decline is really driven by the negative performance we’ve seen on the casualty side,” he said.

He said the combined ratios remain strong, albeit slightly down, and that return on equity is very strong at around 20%. Coates compared that to the last time he was at RVS in Monte Carlo where the talk across the sector was about how weak the market was. That weakness was in the market even in the context of Hurricanes Harvey and Maria where it was expected that the market would harden, which it didn’t. “So it’s clearly a very different cycle.”