Reinsurance cycle likely passed peak. Softer for 2025 but with strong profitability: Fitch

Fitch Ratings has said that it believes the reinsurance pricing cycle has now most likely passed its peak, but the rating agency is still bullish on profitability of reinsurance and thinks returns from the sector “should remain very strong by historical standards in 2025.”

Because of the changed trajectory of the reinsurance rate environment, Fitch said it has revised its global reinsurance sector outlook to ‘neutral’ from ‘improving’.

But noted that, for reinsurers, thanks to capital adequacy and reserve buffers they are “well positioned for a decline in prices even as claims costs continue to rise and catastrophe losses become more significant due to climate change.”

“Given the sector’s abundance of capital, we expect a moderately softer and more competitive market in 2025, barring significantly above-average loss activity in 2H24,” Fitch further explained.

Fitch highlights here the ample capital levels in the industry, from both traditional and alternative reinsurance sources.

But also said it has an expectation that, “underlying margins are likely to remain close to their 2023-2024 peak as reinsurers maintain their underwriting discipline.”

Importantly, Fitch believes attachment points could remain sticky, which would be positive for the sector even if rates do soften off somewhat.

Noting that recent catastrophe losses are in the main being absorbed by primary insurers due to higher attachment points, Fitch said this is “a situation that will persist in 2025 as reinsurers stay cautious on secondary peril exposure.”

On the insurance-linked securities (ILS) market, Fitch noted that investor preference may continue to be for the 144A catastrophe bond structure.

“Catastrophe bonds will continue to be preferred over other insurance-linked securities, such as sidecars and collateralised reinsurance, as they benefit from a better liquidity profile, higher attachment levels and peril- specific coverage, with more limited aggregate protection,” the rating agency explained.