Fitch keeps deteriorating outlook on reinsurance despite sector’s very strong capital position

Fitch Ratings has maintained its deteriorating outlook for the global reinsurance sector for 2027, which the agency says reflects operating conditions that are gradually weakening from still-sound levels. The agency also highlighted that while abundant capacity and rising claims costs will drive margin and revenue erosion, it will not be enough to materially affect the sector’s very strong capital position.

According to the agency, market conditions are expected to remain buyer-friendly through 2027, driven by price declines, though less pronounced than in 2026, and intense competition among reinsurers.

“We expect the soft property market to extend into 2027 absent a very large loss event, with selective loosening in terms and conditions (T&C) beginning to add to pricing declines. Casualty pricing is likely to be more resilient given ongoing reserves and loss-cost pressures, although excess supply could push rates to be inadequate,” Fitch said.

Moreover, the agency acknowledged that global reinsurance capital managed to reach new highs in the first half of 2026, heavily supported by strong retained earnings and the rapid expansion of alternative capital, such as insurance-linked securities (ILS), particularly catastrophe bonds and sidecars, both of which have gained heavy momentum throughout 2026.

“Capital supply is likely to remain ahead of incremental cedant demand in the next 12 months, as reinsurers maintain solid earnings, and investor appetite for insurance-linked securities (ILS) remains strong,” Fitch said.

“As a result, bargaining power should keep moving to reinsurance buyers in property and specialty lines where pricing and structures are becoming more flexible, while casualty conditions are likely to remain more balanced. The supply-demand mismatch could narrow as cedants make greater use of expanded product offerings and buy additional protection, while capital growth may moderate due to shareholder distributions and narrower ILS spreads,” the agency continued.

Furthermore, Fitch noted that in the absence of major unexpected industry losses of sufficient size to remove excess capital (possibly totaling $100 billion), these factors are “unlikely to materially change the market’s buyer-friendly dynamics.”

At the same time, claims pressures continue to build out from a combination of economic, social and medical inflation, climate change, and emerging liabilities related to geopolitics and artificial intelligence (AI).

Fitch stated that reinsurers are likely to absorb a higher share of losses as primary retention normalises from hard-market highs. But the agency indicated that these pressures, while generating earnings volatility, should ultimately help to limit the scale of softening compared to that seen in previous cycles.

“We expect lower pricing since mid-2024 to feed through more fully into 2027 earnings, while renewed inflation pressure and climate change lifts claims costs. This is likely to result in moderate deterioration in combined ratios and return on equity,” the agency noted.

“However, preserved underwriting discipline, portfolio optimisation, prior-year reserve releases and supportive investment income should mitigate the effect on earnings. In this operating environment, intelligent cycle management and disciplined capital allocation will differentiate individual reinsurer performance.”

Fitch concluded: “We expect reinsurers’ capitalization to remain generally very strong, exceeding stated targets and providing sufficient headroom to absorb market shocks. Higher P&C reserve buffers, built up over the past two years through unused catastrophe budgets, add to balance-sheet resilience, while providing flexibility to smooth earnings. We anticipate continued overall favorable reserves development, driven by property and specialty lines, but do not rule out reserves strengthening in selected longer-tail lines due to inflation or major latent and emerging liability risks.”