Moderate and gradual softening expected in property cat reinsurance: Fitch

Speaking this morning at the 2024 Monte Carlo Rendez-Vous event, executives from Fitch Ratings said that with further improvements in fundamentals less likely now, moderate and gradual softening is now expected for property catastrophe rates and pricing.

Manuel Arrivé, CFA, Head of EMEA Reinsurance Ratings at Fitch, explained that the reinsurance market has reached the peak of the current hard market cycle, absent some kind of disruptive loss event occurring, or other influencing factors.

He said that, “The sector is currently in a very good shape, with very strong capitalization, very strong financial performance by historical standards, and we expect, we expect both balance sheet and profitability to remain resilient in 2025 but further improvements in fundamentals from this point are less likely.

“We believe the cycle has most likely passed its peak, but the market condition should remain broadly favorable and supportive of strong returns.”

Going on to say, “On the positive side, we expect a disciplined market with rate adequacy and strict terms and conditions holding firm, despite increasing competitive pressures.”

Increased demand is also expected, while capital supply is likely to remain largely driven by alternative capital sources, so significant increases in reinsurance sector capital are not anticipated.

Arrive said, “Capital has been growing faster than demand, closing the gap in property cat for for example, and this has a stabilising effect on prices.”

He went on to say, “On the negative side, the market is moderately softening, with risk adjusted prices declining from multi-year highs due to high competition, mitigated by underwriting discipline that we expect to be maintained.”

Adding, “Looking forward in property cat, our base case is for moderate and gradual softening of prices, but rates should remain adequate and importantly, the types of terms and conditions that were agreed in 2023 should hold.

“Of course, reinsurers would like rates to stay higher for longer, but it looks like that they’re more open to negotiation on prices rather than structures, because at the moment, structures is more meaningful for profitability.

“We think the favorable market condition are not going to end abruptly, even if loss experience remain benign for the rest of 2024”

Highlighting that, with this backdrop, reinsurance returns are expected to remain very attractive in 2025, Arrive said, “We expect market conditions to remain supportive of strong risk adjusted returns in 2025 in this context.

“We forecast flat to modestly declining margins in 2025 but we are still at very attractive levels of combined ratios around 90% and if you add a stable contribution from investment income, that would translate in a return-on-equity of around 20% for the industry.”