The global reinsurance sector is in a stable position for 2025, said S&P, according to its latest report on the topic.
The ratings agency is expecting strong operating profits, aiding global reinsurers in earning their cost of capital in 2024-2025.
Reinsurers are also benefiting from favourable pricing, supported by terms and conditions in short-tail lines, overall underwriting discipline, and increasing reinsurance demand. In addition, the industry continues to gain from strong investment income due to high bond yields.
The sector also saw robust capitalisation that was redundant at the 99.99% confidence level at year-end 2023 and expected to remain so through year-end 2024, providing a cushion for potential stresses. Favourable reinsurance pricing, supported by terms and conditions in short-tail lines, overall underwriting discipline, and increasing reinsurance demand, adds to the tailwinds that the sector is experiencing.
Global reinsurers generated a strong combined ratio of 91.5% in 2023, significantly better than the previous four-year average of 99.5%.
This positive trend continued into the first nine months of 2024, with generally accepted accounting principles (GAAP) filers' combined ratios in the low 90s and IFRS 17 undiscounted combined ratios of low to mid 90s.
“We expect strong results in 2024-2025, driven by overall still-favourable pricing in short-tailed lines. Natural catastrophe losses and U.S. casualty adverse developments in certain lines are key risks,” S&P said.
Headwinds
However, the reinsurance sector continues to grapple with elevated natural catastrophe influenced by inflation, urbanization, and climate change.
Global insured natural catastrophe losses in 2024 reached $145bn, surpassing $100bn for the fifth year in a row. Reinsurers have made structural improvements and lowered exposure to high frequency events in 2023 and 2024, though primary perils remain a big risk for the sector.
At the same time, property catastrophe reinsurance pricing has given ground globally, although S&P believes that pricing is still favourable. These pricing declines can be linked to increased reinsurance capital, leading to a heightened readiness to deploy capacity. Reinsurers also appeared to offer more flexibility on limits and terms and conditions, the report said.
Additionally, economic inflation, although abating, and social inflationary concerns, as reflected in adverse loss cost trends in certain US casualty lines, remain as challenges for the sector.
Potential financial market volatility and geopolitical tensions may impact both sides of the balance sheet, coupled with a relatively high cost of capital, the report said.