Equity analysts at UK investment bank Peel Hunt said they’ve factored within the potential for reinsurance rates to say no circa 35% over the following five years, explaining that it has factored a softening cycle into its outlook for the reinsurers it covers.
The analysts said they imagine they’ve been prudent by way of the quantum of anticipated rate softening for reinsurance, so will wonderful tune their estimates over the approaching years.
With the worldwide reinsurance market having seen a shift to a softening cycle in property catastrophe risks on the January 2025 renewals, the analysts appear to imagine this might be just the beginning.
Evaluation by the Peel Hunt team found that property catastrophe reinsurance rates fell by a median of circa 9% on the renewals, which they base on the range of estimates provided by brokers in recent days.
Recall that Guy Carpenter reported that loss-free property catastrophe rates were down between 5% and 15% on the January 1st 2025 renewals.
While that broker also said property catastrophe reinsurance rates declined across the globe, with its indices falling by 6.6% for the Global, by 6.2% for the US, and by 5.3% for Europe and seven.2% for Asia Pacific.
Howden Re, meanwhile, estimated that property catastrophe reinsurance rates fell 8%, while retrocession fell further at 13.5% on the January renewals.
Gallagher Re had also given some rate movement estimates, citing US property catastrophe treaties renewing between flat and down 10%, while Australia saw loss-free treaties declining as much as 7.5%, and Korea saw some declines of as much as 25%. But however, US rates-on-line rose by as much as 15% for loss impacted treaties.
The analysts from peel Hunt note that the decline, averaging around 9%, was greater than they’d anticipated.
Although noting that the premium impact of those rate declines has likely been offset partly by exposure growth, while also saying that property catastrophe rates remain adequate being still 60% above the trough of 2017.
As well as, Peel Hunt’s analysts also note that with retrocession rates seeming to have softened further, “the online impact on underwriting margins is closer to 7% – 8%.”
On how this affects the reinsurance firms under their coverage universe, the analysts said, “We anticipate the impact of the 1 January 2025 renewals on our coverage universe will rely on 1) changes in exposures, 2) whether exposures are weighted to the US or Europe (most of our coverage universe is obese within the US industrial market), and three) how diversified the reinsurance book is. Moreover, the rates above are on a loss-free basis. We estimate reinsurers more exposed to loss-hit accounts can have been in a position to push through rate increases, mitigating the decline.”
The analysts highlight that reinsurers increased their capital deployment and exposures on the renewals, being one reason for the softening.
They explained, “At this 12 months’s renewals, traditional reinsurers increased capability, outstripping the continuing rising demand for canopy from cedents. In 2024, supply and demand were balanced, while in 2023, there was a shortage of reinsurance capability. We estimate that the majority of the rise in capability has been allocated to Property and Specialty classes, while Casualty stays relatively stable amid ongoing concerns about US Casualty price adequacy and reserve quality across primary carriers.
“Importantly, reinsurers maintained overall underwriting discipline, with attachment points largely unchanged. Primary insurers proceed to extend reinsurance limits to dump more tail-risk to the reinsurance industry. Nonetheless, primary insurers were less successful in persuading reinsurers to hedge their lower-layer frequency exposures within the US, though they were barely more successful in renegotiating attachment points in Europe, where some brokers suggest leading reinsurers were defending their market share.”
Citing “signs that the cycle has peaked,” the analysts also said that “Nevertheless, rate adequacy stays very attractive, and reinsurers proceed to deploy capital.”
So this provides you an idea of what one equity analyst team are anticipating for reinsurance pricing over the approaching years. Rather a lot can change in fact and the market stays finely balanced, so any elevation of loss trends could change the outlook direction, we suspect.
But, as we’ve been explaining in our coverage, investors in reinsurance, catastrophe bonds and insurance-linked securities (ILS) shall be watching the direction of rates and pricing closely over the approaching years.
While at this stage they continue to be at historically very attractive levels, there shall be some scrutiny on the reinsurance renewals ahead, as investors on each traditional and alternative capital sides watch to see how disciplined market participants are on this latest softer phase of the industry cycle.
After all, pricing is only one piece of the equation, so investors may also be looking ahead to signals on efficiency and value of capital, in addition to how contract terms, conditions and maybe most significantly attachment points develop over the approaching 12 months.
Read all of our reinsurance renewals coverage here.