What are your expectations for 1.1 renewal supply/demand dynamics?
Sven Althoff, board member, Hannover Re: The 2024 loss experience will certainly have an impact on individual market dynamics by region and line of business. The market will seek to defend its profitability, which has finally reached adequate levels after years of soft market conditions. For 2025, we expect a more stable supply and demand as reinsurers’ improved returns will allow them to gradually increase capacity to meet client demand.
Thomas Blunck, board member, Munich Re: The market environment remains fragile and the current market equilibrium is susceptible to change. A primary concern is the market’s resilience in the face of significant potential future losses, which could impact its delicate balance. Many market participants view this year’s hurricane season and overall loss activity as pivotal factors for the future path of the market and are equipping themselves with additional capacity in traditional and alternative markets. We haven’t observed any major new market entrants, but rather an expansion of existing capacities, accompanied by increased confidence among the established players.
Jean-Paul Conoscente, CEO of Scor P&C: The mid-year renewals have set the stage for a more competitive reinsurance market in 2025. The outlook will depend on natural catastrophe losses at the end of 2024 (with forecasts of a very active Atlantic hurricane season), US casualty reserve developments (with high social inflation extending beyond the US) and ongoing geopolitical disruptions (driven by wars, international tensions and elections) that could impact financial and capital market. 2024 has seen a measured growth of the cat bond market and return of investor interest in other ILS products (such as sidecars and collateralized reinsurance) and in other lines of business beyond cat (such as cyber and casualty). However, this appetite continues to come with high return expectations and available capacity remains insufficient to meet increasing sponsors’ demand.
David Priebe, chairman, Guy Carpenter: As the market looks ahead to 2025, the supply side of the equation will be impacted, in part, by global loss activity for the rest of the year. To date, loss patterns have been similar to 2023 when incumbent reinsurers’ shareholder equity rose approximately $35bn creating additional capacity to meet rising demand. Guy Carpenter expects there will continue to be somewhat elevated demand moving into 2025 for property catastrophe limit that will be met provided pricing/capacity remain in balance. Driving the building momentum for demand are continued (albeit lesser) increases in property valuations, growth in overall exposure, model version changes, and cedents’ ongoing focus on further risk mitigation.
Jill Beggs, reinsurance COO, Everest: Trading conditions continue to be favorable, particularly in property and specialty lines. In property, new capacity supply is being driven by disciplined players. Barring any large insured market events, we expect property pricing to remain adequate at 1.1. Specialty lines affected by Russia-Ukraine, such as marine, aviation and political risk, will continue to see rates and terms improving. Regarding US casualty, our concerns around legal system abuse persist, which drive higher loss trends than historical averages. We must continue to see primary rate acceleration in this space as well as ceding commissions representing alignment of interest with our cedants, which in many cases means lower than current levels.
Matt Paskin, CUO and chairman of reinsurance, Convex Group: With increased volatility comes increased demand for coverage. Risks related to climate, geopolitical uncertainty, regulatory pressure, casualty under-reserving and inflation are building the need for more reinsurance purchase. In the property market, we are seeing a stabilising influence as carriers recognise the need for extra coverage – close to $40bn additional limit in H1; outside of property, the market is still adjusting its understanding of potential losses and underlying growth and evolution of asset values, in energy and construction lines, or vessel sizes or even potential correlations in cyber-related claims.
Simon Hedley, CEO of Acrisure Re: From a critical cat property perspective, the market has stabilised. Overall ceding companies have taken on more retention exposure in the past renewal cycles and many of the [US] southeast homeowners’ carriers have placed structured quota share reinsurance to help protect their deferred acquisition expense and mitigate increased volatility. Larger carriers with bigger balance sheets are now exploring and buying low level structured reinsurance multi-year transactions to help manage earnings volatility once typically protected by traditional aggregate covers and low-attaching XoL. We believe the models for SCS (secondary perils) are still not viewed favourably and many (re)insurance companies have their own view of the expected loss… and this results in a market price disconnection.
Tom Wakefield, CEO of Gallagher Re: As things stand now, we anticipate an orderly 1 January renewal with balanced growth in both demand and supply. Demand is driven by economic expansion, inflation, and insurers' efforts to revalue assets, plus reinsurers have experienced strong organic capital generation, leading to a 12% growth in the reinsurance capital base, in 2023. Stability is expected in liability lines, particularly in the US, as buyers and sellers adjust pricing and terms to address rising loss trends. It is crucial to focus on clients' specific exposures and avoid oversimplification.
How much pressure do you expect cat rates to come under in 2025?
Urs Baertschi, CEO, P&C reinsurance: It's still early days, and a lot can change, particularly with the Atlantic hurricane season. What we do know is that in the last four years, global insured losses from natural catastrophes exceeded $100bn, and this year, the trend appears to continue. In early August, the Swiss Re Institute published its estimate of $60bn in global insured losses for the first half of 2024. This is 62% above a 10-year average.
Wakefield: Reinsurers have avoided a significant burden of global catastrophe events, with insured losses exceeding $100bn for the fourth consecutive year in 2023. Insurers bore a disproportionate share of these losses due to event nature and increased reinsurance attachments. In 2023, natural catastrophes had a below-average impact on reinsurers' combined ratios. Demand for higher-end programs has increased due to the inflationary environment, with an 8% rise in limit purchases from 2023 to 2024, representing insurers catching up on delayed purchases of $35bn-$40bn. Our estimate suggests a potential 4% increase in global catastrophe limit for 2025 (about $20bn), while ample capacity exists to support growth in higher-end programs. Price increases are not expected, but there may be more pricing flexibility as reinsurers maintain elevated rate adequacy.
Blunck: We don’t see signs of a weaker market overall, although there has been a certain stabilisation of prices in some markets. Yet, uncertainties are still on the rise and this has to be reflected in pricing, e.g. for nat cat and cyber. In property cat, we see a mixed picture with some regions experiencing continued price increases and improving conditions, e.g. in Australia and Latin America, whilst other markets face intensifying pressure and are more competitive. We are committed to approaching every client and their specific challenges and needs individually.
Conoscente: The modelling of non-peak perils is likely to be at the core of the renewals’ discussions, given their increasing contribution to global insurance loss in recent years. Another topic that could significantly impact the supply/demand dynamics, and consequently the US cat rates, is the adoption by insurers of Moody's RMS v23 model to incorporate recent climate change insights and loss activity data into their risk views. All these challenges point towards maintaining discipline with regards to the improvements in terms and conditions which we have achieved during the market hardening, but rate changes will vary across clients, regions, and past results.
Priebe: Barring a major loss between now and 1 January, catastrophe rates are largely considered to be adequate. With returning levels of capacity available in sectors where pricing experienced supply/demand imbalance, better equilibrium is returning and pricing is adjusting. Price is likely to remain heavily dependent on the specifics of each placement, including portfolio composition and historical pricing movement. Some upper non-loss impacted layers are expected to continue downward risk-adjusted shifts similar to trends seen at mid-year. Capacity is expected to remain more constrained for loss-impacted lower layers, particularly accounts in the US impacted by SCS.
Paskin: This is a question that none of us can truly answer until we are heading into the 1 January renewal period. If we have a benign hurricane season, and thus more retained earnings, there may be more appetite, particularly at the higher end of programs. The underlying market dynamics, such as increased competition and the complex spectrum of product offerings, have contributed to a relatively stable picture for reinsurance in 2024 but the market can be vastly different depending on the level of severity cat, frequency or aggregate losses that we face.
What kind of influence is the ILS market playing in the segment near-term?
Blunck: The vast majority of alternative capacity is covering tail nat-cat risk in peak zones, limiting its role to a relatively small part of the total reinsurance market. Considering the share ILSs have in the market, their influence will remain limited. This concentration has further increased recently with the trend of alternative capital reallocations to more liquid funds that only target the high nat cat layers. The supply of alternative capacity has been quite balanced so far. Most investors are employing capital in a disciplined manner and will likely continue to do so, as the ILS case is still under scrutiny after only a relatively short period of good performance.
Conoscente: While 2024 has definitely seen a return of investor interest for ILS products, it comes with high return expectations and available capacity remains insufficient to meet sponsor demand. In conjunction with what is anticipated to be an active 2024 cat year, current ILS market trends are therefore unlikely to contribute to any significant pricing compression heading into 1 January 2025.
Althoff: The ILS market plays an important role in the management of risk concentrations and provides strong support to traditional reinsurance markets. The market requires attractive returns in order to function. Therefore we expect the ILS market to remain more or less stable in terms of pricing in the near term, with the potential for further growth in ILS market volume if we have a normal loss activity for the remainder of 2024.
Paskin: ILS will always have a role to play in the reinsurance market. There is evidence of new capacity entering the market, with momentum continuing to build and some carriers being given huge limits. However, this type of capacity is highly sensitive and can dry up at a rapid rate as we have seen at certain points of cyclical distress.
Beggs: With more than 100 sponsors, including insurers, reinsurers and government-sponsored entities, the $48bn catastrophe bond market has demonstrated broad appeal to both the protection buyers and the institutional investment community. In fact, given the overall $17bn increase in the ILS market since the start of 2023, driven by a sharp increase in the cat bond asset class and certain high-risk collateralised reinsurance strategies, it may have taken the place of the rated start-up – given the lack thereof during this generational hard market.
Has the reinsurance sector done well enough in the past 18 months to redress its standing with equity investors?
Wakefield: Reinsurers' share prices have performed exceptionally well, with Munich Re and RenaissanceRe for example both seeing significant increases. This is due to strong returns and a revaluation of the reinsurance business model by investors, who now assign higher value to established reinsurers. However, the higher franchise values may attract new entrants and increase competition. Insurers also face challenges in balancing revenue growth in a softening market with investor expectations to manage volatility. It is important to strike a balance to avoid severe cyclical swings and maintain market efficiency.
Althoff: In the previous soft market cycle, reinsurers struggled to earn their cost of capital and consequently failed to meet investors' expectations. However, this situation changed with the 1 January 2023 renewals, which marked a significant hardening of the market. As a result, capital positions and financial performance have improved across the sector. To fully regain investor confidence, consistent performance over a longer period of time is required.
Conoscente: Despite favourable sector conditions, new capital inflows remain limited, influenced by high catastrophe loss activity and economic uncertainty. The adoption of the IFRS 17 framework in 2023 has added complexity to key financial metrics. While it promises more consistent and reliable financial reporting for investors in the long term, it has come with big challenges and costs for implementation and high volatility in results during the transition period, making some investors cautious. We therefore expect it will take at least another good year before investors’ appetite for reinsurance increases significantly.
Hedley: The global reinsurance markets have made significant margin progress and are generally comfortably covering the cost of capital. If the reinsurance market again delivers reasonably solid results, the market will be prime for an influx of new investors. A big part of the rationale is that extra supply can meet the buyers’ growing demand for capacity. In 2022 and even 2023, we had higher demand with limitations on supply. The 2024 renewal cycle seemed to match supply and demand hence, the rates were relatively flat to slightly down for critical cat (but at a very high point). A more commercial trading market with capital seeking opportunities and therefore meeting client demands is quite possible.