Property reinsurance hard market to persist in 2023: Fitch

The hard property reinsurance market environment is expected to persist throughout 2023, with rising prices helping to compensate for claims inflation and volatility in financial markets, Fitch Ratings believes.

While there has been some evidence through the first-quarter of the year that reinsurance rates-on-line (RoL) might have eased back slightly from their January 1st peak, they are expected to remain in hard market territory.

We’ve seen some evidence of price easing in the catastrophe bond market, albeit with the spreads new cat bonds have closed at still at or near multi-decadal highs.

In reinsurance, anecdotally we understand any deals placed through the first-quarter to fill out gaps in reinsurance and retro towers have in some cases been at rates slightly off their pre-1/1 peaks, although again they remain at least at decadal highs.

We also understand industry-loss warranty (ILW) pricing has eased back from the peaks it set at the end of 2022 and into the first weeks of 2023, although again, in the case of ILW’s the rates remain at or near record highs.

So we remain in hard market territory and with forecasts seeing that as likely to persist right through the year, the question will be whether further easing is likely in the future.

Commenting on the big four European reinsurers, the rating agency said, “Fitch Ratings believes that the hard market environment, with rising prices, will continue in 2023, helping to mitigate high claims inflation and volatile financial markets.”

Adding that, “All four major European reinsurers secured significant price increases and more favourable terms and conditions across their property and specialty lines of business at the January 2023 renewals.”

Because of the improved pricing and also tighter terns, Fitch is forecasting a 400bp improvement in combined ratios for the major reinsurance firms in 2023.

Our sources are suggesting that April 1st renewals will see some of the strongest year-on-year increases witnessed for regions such as Japan, as that market’s property catastrophe reinsurance contracts catch-up to the levels of return now demanded by both traditional reinsurers and ILS investors.

Looking further ahead to June and July, while it’s uncertain how much property reinsurance rates will harden, it is expected to be a further hike upwards from the rates seen in 2022, confirming the still hardening trend for that part of the world.

“Fitch expects the hard property market to continue during the remaining 2023 renewals, which have a higher share of nat cat exposed business than the January renewals,” the rating agency explained.

As we said, the question will be on whether easing is likely in future, but right now it seems the first chance of rates actually easing back at all meaningfully won’t be seen until January 2024 and that is dependent on how the rest of this year plays out, in terms of losses, as well as how much capital can come in and whether it is more than the increased demand that’s expected to be seen.

The supply-demand balance could be more important than ever later this year, which will be watched closely by rating agencies and us alike.