Fitch revises global reinsurance sector outlook to neutral as margins stabilise

Fitch Ratings has revised its outlook on the global reinsurance sector to neutral from improving, with the rating agency highlighting that this does not constitute a downgrade as the sector has stabilised at a better position compared to last year.

The revised outlook was underpinned by the assumption that credit drivers will remain broadly stable over the next 12 months, Fitch’s insurance credit financial analyst Manuel Arrivé explained at a media briefing in London.

“It’s a year on year definition – a year ago we thought things would improve for the reinsurance sector, and they did. Today, we don’t think there will be further improvements, so it’s neutral,” he said.

Positive credit drivers included strong capitalisation and record profitability (by historical standards), with balance sheet strength and financial performance expected to remain resilient into 2025.

“We expect a disciplined market with rate adequacy and strict terms and conditions holding firm. It’s not only about prices but terms and conditions as well, and this is despite increasing competitive pressures,” said Arrivé.

“Reserve adequacy is strong overall – I stress overall – with sustained favourable reserve developments for most lines of business. What’s important here is that both capitalisation and reserve buffers provide protection against unexpected earnings volatility or return of the cycle.”

Fitch added that the property cat reinsurance pricing cycle has most likely passed its peak, with underlying margins expected to remain flat or modestly decline in 2025 as reinsurers maintain underwriting discipline and rate adequacy.

“Of course, reinsurers would like higher rates for longer, but that’s not going to happen. They're more open to negotiation on prices rather than structures, because the reinsurance structural changes that were achieved are, at the moment, more important for profitability than prices,” Arrivé added.

“We think these favourable market conditions will not end abruptly, even if the loss experience remains benign for the rest of 2024. That said, we hear from market participants that the market remains nervous and could harden again if there is a high-magnitude unexpected event in the second half of the year.”

Litigation trends loom over US casualty lines

In casualty lines, Fitch anticipates that pricing increases at 1.1 will just about be able to offset social inflation of 5-10 percent for US risks, particularly corporate general and auto liability.

In addition, challenges in projecting ultimate losses following post-pandemic changes in claims frequency, payment patterns and loss severity will add uncertainty over loss reserve adequacy for certain US general liability lines in accident years 2021-23, with reinsurers to be selective in expanding their book of business to maintain price adequacy.

“In casualty, rates will continue to vary by subline but the focus is on US casualty rates, which we expect should keep pace with rising costs due to social inflation,” said Arrivé.

“The exposures written in 2014 to 2019 are the most exposed, but we see that there will be a prolonged impact from social inflation going beyond those vintages and affecting the newer ones. So we're very watchful of casualty reserve efficiencies, which could weaken the capitalisation of some companies.”

Looking forward, Fitch expects net prior-year favourable reserve development to decline from $4.1bn in 2023 to $3.3bn and $1.8bn in 2024 and 2025, respectively.

With catastrophe losses expected to increase to $14.3bn in 2024 and $16.4bn in 2025, Fitch has forecasted a slight deterioration in the calendar-year combined ratio to 88.2 percent and 90.2 percent, respectively.