According to Goldman Sachs, the market backdrop for property & casualty (P&C) reinsurance remains favourable, following rates hardening following the impact of Hurricane Ian, and 2023 seeing the strongest subsector return on equity’s (ROEs) of the past seven years.
Analysts noted that P&C Re risk-adjusted rates have been stable to moderately declining in 2024, albeit from a much higher base.
However, looking ahead to 2025, Goldman Sachs is not expecting to see a material softening of the P&C Re market, due to a number of factors:
Firstly, analysts are expecting to see greater demand for property, driven by higher underlying values, urbanisation and the impact of inflation on repair costs.
At the same time, demand for specialty remains strong, with Goldman Sachs anticipating to see growth in engineering, in line with the positive outlook for construction.
There is also continued demand for cyber reinsurance, and there has not been an influx of new capital to the space.
“Overall, we believe that this points to a relatively balanced supply-demand picture as the reinsurers continue to focus on delivering consistent and sustainable returns,” Goldman Sachs said.
Moving forward, analysts noted that the reinsurance subsector’s ROE has been below its cost of equity in four of the last seven years.
“Until the end of 2022, the subsector’s narrative was one of an increasing supply of capital, a softening pricing cycle and elevated losses (nat cat, secondary perils and US social inflation). Hurricane Ian proved a turning point, as pricing materially increased, capital formation has been relatively subdued and the reinsurers have pivoted their books away from frequency style losses,” Goldman Sachs said.
Interestingly, analysts highlighted how the loss environment remains uncertain, given that $100 billion global insured nat cat losses has become the new normal. It’s important to remember that 2023 marked the fourth consecutive year above this threshold, and 2024 is heading towards the same direction with c.$60 billion of losses recorded in the first half of the year.
“Major hurricanes and earthquakes create volatility, but a key driver of the increase has been non-peak perils such as severe thunderstorms with hail, tornadoes, flooding and forest fires. The reinsurers have pivoted their books away from these more frequency-style losses, so have avoided picking up much of the elevated loss experience in the first half,” Goldman Sachs added.
Concluding: “Despite this, we are conscious that we are initiating within the US hurricane season, which creates some tail risks. There has also been an increase in US casualty claims costs from increasing litigation, broader definitions of liability, more plaintiff-friendly legal decisions, and larger compensatory jury awards (a phenomenon known as social inflation). This has been a particular issue for Swiss Re, and although extensive remediation work has already been undertaken, further reserve strengthening remains a risk.”
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