Fitch Ratings has revised its global reinsurance sector outlook to ‘improving’ from ‘neutral’ reflecting the sector’s strengthening financial performance that is anticipated to extend into 2024.
The rating agency noted in a recent report that near-term price rises are likely to outpace increases in claims costs and it expects underwriting margins to peak next year.
Fitch also highlighted that rising reinvestment yields and strong demand for reinsurance should increasingly support earnings.
“We believe pricing for natural catastrophe risks will better reflect the impact of climate change on claims, particularly as several reinsurers are cutting back on cover for medium-sized natural catastrophe risks, making pricing less competitive,” the firm wrote.
The rating agency forecasts the sector’s combined ratio to be 94% for 2024 and expects its near-term return on capital to exceed its 8%-10% cost of capital.
Fitch went on, “Further price rises in property lines are likely in 2024, together with tighter terms and conditions, after several years of poor underwriting results due to inadequately priced risks, the impact of climate change on claims, and unexpectedly high inflation.
“However, the increases are likely to be more moderate than in 2023 as prices approach or surpass rate adequacy.”
Elsewhere, the rating agency noted that prices for casualty lines should be stable in 2024 due to an “ample allocation of reinsurance capital and significant repricing by primary insurers in recent years to offset high levels of social inflation.”
Fitch said it expects the reinsurance sector to maintain very strong capital in 2024, however, better underwriting margins could lead to greater capital repatriation if capital cannot be deployed to grow business at attractive margins.
The rating agency concluded that renewed interest from institutional investors due to higher expected returns could lead to an influx of alternative capital to the sector, and it thus expects the abundance of traditional and alternative capital to lead to a gradual softening of the reinsurance market from 2025.
