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Moody’s reinsurance outlook goes positive on healthier risk-return dynamics

Moody’s has confirmed its positive outlook for the global reinsurance sector as reduced exposure to high-frequency, lower-severity natural catastrophe events has supported healthier risk/return dynamics and expectations for continued strong profitability.

The rating agency said reinsurance prices remain high with policy terms and conditions continuing to be tight. This has been supported by an upward reassessment of risk, which has seen a reduced earnings drag from high-frequency cat events.

In a press briefing, Moody’s credit officer, Brandan Holmes, said: “Reinsurers had lagged quite significantly, but it's caught up sharply, and this is in large part because of the shift in exposure to small to medium-sized events, also sometimes known as secondary perils, from reinsurers to primary insurers.”

But Moody’s said the shift means there is now significant unmet demand from primary insurers for reinsurance solutions to address their earnings vulnerability to an accumulation of low-severity weather events.

While reinsurers may accommodate this as competition intensifies, the rating agency said they will not fully restore previous levels of exposure until more sophisticated data and modelling gives them the confidence to provide more capacity.

Nonetheless, with limited capital entering the market, Moody’s said these conditions should drive continued strong profitability for the global reinsurance sector over the next year.

Moody’s buyers’ survey said prices would likely remain stable or increase in 2025, which the rating agency said reflected healthy pricing across most lines of business.

The survey suggested a slowdown of rate increases and some rate decreases in catastrophe-exposed property lines. Any continued rate increases were said to be due to a combination of rising loss costs and the continued limited supply of reinsurance.

And Moody’s Holmes was emphatic that, at least directionally, property pricing remained up.

Holmes said: “I think directionally, we see prices continuing to increase although at a more steady pace. But I think the important takeaway is that in property, where buyers expect to pay less for reinsurance, that's often due to exposure reduction. So from a reinsurance perspective, the risk adjusted return is still increasing.”

Casualty reserves remain a concern

Persistently high claims have resulted in a strengthening in casualty reinsurance prices, although not uniformly across classes.

US casualty rates have seen a cumulative increase of ~80 percent since early 2016. Moody’s pointed towards larger jury awards and high inflation pushing up the physical damage element of claims, with excess of loss reinsurance rates moving roughly in line with primary prices.

Moody’s said leading reinsurers continue to place pressure on primary customers to reduce exposures to high risk areas as claims still rise at a faster pace than prices in certain segments and underwriting years.

High loss trends have acted as a source of reserving risk, with reserve development for reinsurers falling to around 1 percent in 2023 from 5 percent in 2015.

“The next year or so will be interesting to see to what extent any reserve strengthening does come through. We certainly expect some reinsurers to take advantage of the discount profitability elsewhere in their businesses to add to reserves over the next year, but bring it back to our outlook”, said Holmes.