Reinsurance Market Sees Mid-Term Rate Softening
Global warming continues to push up temperatures, causing stronger storms, rising sea levels and more frequent droughts. This is fueling catastrophe losses around the world. Common sense suggests that demand for reinsurance should continue to grow. It has been growing to some extent, but the industry is not yet capital-constrained, so the cycle is leaning in the other direction.
Morningstar research points directly to excess reinsurance capacity as the main problem in the medium term.
Analysts believe the reinsurance market will lower rates again, despite climate risks that on paper should support long-term growth.
The property and casualty business operates in cycles. It has been going through a tough period since 2021, when high demand and tight supply pushed up prices and profitability.
This typically attracts new entrants, which then reduces the margin of the reinsurance business.
The top 10 reinsurers control 69.4% of the market, equal to a Herfindahl-Hirschman index of 586.3, which indicates the sector is unconcentrated.
Low barriers ensure that new money flows in, and fresh capital continues to absorb pricing power.
Morningstar says the reinsurance market has peaked in 2023. The slowdown in earnings won’t be fully visible for another year or two, but a downturn is coming. Premiums are already showing it, and once they dry up, earnings will start to stall. Falling interest rates, coupled with lower inflation, will also weigh on reinvestment returns.
Back in 2017, Hurricanes Harvey, Irma, and Maria ended a soft cycle. A year of major catastrophes in 2021, including Hurricane Ida, accelerated this shift. Pricing strengthened, reinsurance yields soared, and capital poured in again.
By 2022, alternative capital had reached record levels, muting a tough market before it could stabilize reinsurance rates.
Morningstar analysts believe the market has been through a long cycle. They count seven years of tightening conditions, first smooth between 2018 and 2020, then sharp after 2021.
Reinsurance cycles, experts say, are getting longer. Maybe they are. But according to Morningstar, the reset has already happened, and the urgent question is to return to soft pricing and lower rates.
Losses from the recent California wildfires have failed to offset the excess capital available to reinsurers. And as global catastrophe losses have eased from previous highs, the market has eased somewhat.
Morningstar expects reinsurers to face lower profits over the next two to three years as excess supply outweighs climate-driven demand.