Reinsurance rate declines may slow by 2028, soft market floor may not be found till 2030: Jefferies

Analysts from Jefferies are not confident that reinsurance leadership teams are fully-acknowledging how fast rates have been softening and believe that the focus will shift to terms and conditions from 2028, while a soft market floor may not be found until 2030.

The equity analyst team at investment bank Jefferies have a view that the executive teams of major reinsurance firms may have been overly hopeful about the direction of travel in reinsurance pricing.

They explain, “For the past 18 months, every reinsurance management team has pushed back on investor expectations for a soft market, emphasising that the starting point for margins was a risk-adjusted all-time high and that prices were softening, but not soft.

“While that was true, the pace of the softening has clearly been closer to investor fears than management’s optimism.”

They believe this disconnect continues, as reinsurer management teams now tell the analysts that price declines should slow down at the January 2027 reinsurance renewals, something the Jefferies analysts lack confidence in.

“We disagree, and suspect most investors do too,” the analysts state. “In our view, the pace of decline will accelerate next year, and only start to slow in 2028.”

In a similar fashion to the softening of the reinsurance market, particularly in US property catastrophe risks, through the 2010’s, the Jefferies team expect that once reinsurers begin to appreciate just how much the reduction in pricing is affecting their premium income, the focus will shift towards a quickening of the relaxation of terms and conditions.

That would be playing out just like we saw through the 2010’s, when prices began the soft market pattern, but it was stretched terms and conditions that caused the damage when catastrophe losses spiked again from 2017.

From 2028, when the expected slow-down in rate softening occurs, the Jefferies team expect that, “Thereafter, we expect softening to be on the terms and conditions, which tend to deteriorate late in a cycle, once reinsurers can no longer afford to give up premium income.”

Adding that, “We eventually expect prices and terms to find a floor in 2030.”

Pricing is deteriorating faster than management teams had expected, the Jefferies team believe, with third-party capital seen as one factor.

However, it’s worth noting that both AM Best and Moody’s have said that traditional reinsurance capital, which has built up to record levels, is the main driver of the soft market environment seen today.

Insurance-linked securities capital is, of course, a factor as well. But ILS capital growth has been strongest in higher-layer property catastrophe reinsurance risks, largely through the catastrophe bond market so far.

Jefferies equity analyst team see traditional reinsurers as having levers they can pull, to help maintain income and profits, including through their ample reserves they have built up, which the analysts suggest can be released over time to ward off some of the soft market effects.

Commenting specifically on reinsurance giant Munich Re they say, “These will need to be released over time but expect management to slow these releases as long as possible, so that peers run out faster. Being less sustainable, these are lower quality profits, but smooths the cycle in earnings.”

All of which speaks to the need for discipline to be maintained in the reinsurance and ILS market and that selective approaches could make the difference over the coming years.

While the reinsurance market seems set into a softening cycle at this time, there are still external factors to consider, from the recurrence of significant insured loss activity, to the geopolitical situation and the perceived cost of institutional capital.

While the soft market is playing out much like the 2010’s so far, investor sentiment may be more fragile than it was at that time and this should be watched closely over the coming year.

Analyst teams are becoming increasingly bearish on the near-term outlook for the sector and will be watching closely for evidence of reinsurers adopting aggressive growth strategies into the still-softening reinsurance market.

For the ILS and cat bond market, all eyes will be on pricing over the coming months, as the catastrophe bond pipeline may provide some clearer evidence of what to expect for 2027 and beyond.

In particular, we’ll be watching how terms and conditions develop as this was the main detractor from performance once catastrophe loss activity picked up the last time around.