Demand for reinsurance will remain high, with rates peaking in 2024
Analysts at Moody’s Investors Service expect demand for reinsurance protection to remain strong in 2024, but warn that while reinsurers have room to raise rates further as competition in the sector intensifies, prices will peak this year.
Moody’s predicts a peak in reinsurance rates in 2024 after rising significantly in recent years, particularly in 2023, which saw one of the sharpest increases in property catastrophes in a decade.
As of January 1, 2024, at the time of renewal of reinsurance contracts, prices continued to rise, albeit less than a year earlier, and the result, according to Moody’s report, suggests that reinsurers have the opportunity to push through additional moderate increases in April and summer, especially by property types.
Analysts say reinsurance prices are “likely to peak as competition intensifies”.
Meanwhile, higher earnings in 2023 will encourage some players to expand reinsurance capacities and take on more risk, and Moody’s believes the positive results could also lead to more inflows of alternative reinsurance capital after the easing period. All this, analysts say, will make the dynamics of supply and demand for reinsurance less favorable.
“Therefore, we expect XоL (excess of loss) reinsurance prices, especially in property catastrophe lines, to reach their highest level by the end of the year, in the absence of major catastrophes. However, property reinsurers’ underlying earnings should remain higher through 2023, provided they maintain higher anchor points and tighter contract terms,” the rating agency said.
As reinsurers continue to report their financials for 2023, it is clear that many have achieved significant P&C growth due to rate increases and structural changes, including a move away from frequency events.
This year, Moody’s expects P&C reinsurance premium growth to continue as higher sums insured and heightened risk perception amid consecutive years of more than $100 billion in insured catastrophe losses supports demand for reinsurance coverage.
Interestingly, Moody’s expects steady growth despite forecasts that economic growth in the G-20 countries will fall to an average of 2.1% in 2024 from 2.8% last year. This trend is expected to moderate demand for primary insurance but not for P&C reinsurance.
“Continued, albeit decelerating, growth in primary insurance premiums will support reinsurers’ quota allocation programs. Demand for property excess loss (XоL) reinsurance, under which reinsurers cover losses in excess of a certain pre-set limit, will also increase in line with inflationary increases in policyholders’ valuations. At the same time, insurers will continue to refine their catastrophe models to reflect higher-than-average claims for 6 of the past 10 years. This will increase projected losses and encourage major players to buy more XOL reinsurance coverage to protect themselves against extreme losses that could lead to significant capital depletion. Demand for XоL catastrophe reinsurance in the US remains strong and, according to Deloitte data, will grow by 15% this year, Moody’s reports.
Apart from property, Moody’s also expects demand for casualty reinsurance to remain robust and insurers to show greater interest in discretionary reinsurance as they explore alternative ways to reduce volatility.
“In addition to traditional types of property and casualty reinsurance, demand for cyber reinsurance will remain strong amid increased awareness of cyber risks and the continued growth of the primary cyber market. However, the premium expansion will be partially offset by falling rates following the recent sharp increase, reflecting improved underwriting.”
Analysts expect reinsurance rates to peak at some point this year, but of course the outlook could change. Secondary perils such as floods, wildfires and severe convective storms caused losses for the insurance industry in 2023, and if a similar story happens this year with a major hurricane making landfall in the US, supply and demand dynamics could change again.