Reinsurers: Which Way Will the Fear and Greed Pendulum Swing in 2025?

The reinsurance industry is in great shape as it gathers in Monte Carlo for its annual MeetingThe hurricane season is only halfway through, but the recovery numbers for 2025 have still not been determined.

Before last year’s event, this publication noted that the reinsurance “buyout arc” had not yet been completed. Another year after 2022, with the market firm, reinsurers are currently enjoying the peak of that arc.

With average returns on equity in the mid-teens to mid-twenties, and in some cases still higher in 2023, first-half returns also look solid (for more on ROE, see our chart of the day, p. 11).

But as the market continues to move beyond its peak, reinsurers are having to balance the desire to grow with the fear of undoing the hard work of the past five years by relaxing the discipline of underwriting.

The ever-increasing frequency of losses from secondary risks – most of which now accrue to insurers – continues to be a primary concern for reinsurers.

Sources indicated that major losses from severe convective storms (SCS) – the largest driver of losses for catalytic policyholders in the first half of 2024 – is one of the risks that is particularly affecting reinsurers’ discipline.

How reinsurers navigate this line between greed and fear will determine the outcome of the 2025 renewal season.

Appetite for growth versus demand

There has been a visible drive for reinsurance growth throughout the year so far, as insurers sought to fill their portfolios with profitable clients.

The lack of new business in the reinsurance industry – in contrast to the abundance of new businesses that launched in difficult markets in 2002 and 2006 – also limited potential competition for incumbent reinsurers, giving them greater influence over prices and terms during market changes.

However, this year’s licence renewals have highlighted the changing balance of power between reinsurers and brokers, as reinsurers’ desire to continue to grow is starting to create renewed competitive tensions.

“Reinsurers are taking on brokers again,” one source said, pointing to insurers’ eagerness to receive U.S. reinsurance premiums.

But that appetite is not without a dose of caution. Reinsurers have been badly burned over the past decade and are scrambling to protect themselves against the growing threat of secondary risks, with the rise in catastrophes skewing business that meets the required parameters.

For most, this means keeping high leverage points and refusing to enter into bulk trades to reduce exposure to mid-sized events.

Hiscox Re & ILS chief executive Kathleen Reardon added that cedents had had time to make improvements to their underlying portfolios, which would also streamline reinsurance renewal discussions and allow reinsurers to present cedents with more options within certain parameters.

“These are conversations we haven’t had for at least five years because we were on the battlefield,” she said.

Even if reinsurers fail to provide their clients with the low level of earnings volatility coverage they would like, sources say inflation and pent-up demand are likely to drive purchases of additional vertical cap this year. This new demand will absorb the strong supply from stalled earnings growth, providing countervailing stability for reinsurers’ renewed competitiveness.

One source suggested that globally, cedants will look to buy an additional $35-40 billion by January 1 this year.

Gallagher Re CEO Tom Wakefield has estimated that boiler caps could rise by about 4% or $20 billion by 2025, according to comments made at our virtual roundtable, “The Big Questions” (see page 12 for more perspectives from leading industry executives).

Guy Carpenter CEO David Priebe said he did not expect the supply and demand situation to change significantly, with growth in retained earnings expected to be offset by new demand.

This may apply to customers seeking additional aggregate coverage, but for aggregation of losses of varying severity rather than at the frequency level we have seen previously.

When it comes to the number of victims, the picture remains complicated.

Many of the largest reinsurance companies have undertaken targeted portfolio actions on certain casualty risks, moving away from insurance classes in which they have experienced significant losses in recent years.

For example, Swiss Re lowered its US accident insurance premium in the middle of this year, as did Munich Re.

The impact of social inflation on carryforwards losses also resulted in a more cautious approach to provisioning and pricing of accident insurance since the “bad years” of 2015-2019 and a strengthening – albeit more gradual than in the case of property insurance – of the accident reinsurance business.

As a result, sources expect further price increases for excess loss contracts.

Across the P&C sector, the impression so far is that the market balance is still delicately balanced. The level of oversubscription for well-priced, top-tier P&C lines in 2024 renewals shows reinsurers’ appetite for growth – and pricing pressures in this area are likely to accelerate after showing signs of modest easing in 2023 renewals.

At the same time, investors remain nervous – the withdrawal of ILS investments earlier this year amid the forecast for a hurricane season is evidence of those concerns.

The sources believe reinsurers have proven to their investors that profitable operations are possible. “Now they need to prove it’s sustainable,” one source said.

Preparing for the crisis

While reinsurers have enjoyed a period of rate adequacy, everyone has noticed a slowdown in growth, if not a decline in some regions, in the catastrophe market. As things progress, reinsurers now need to target the right time to curb growth.

Some sources are more optimistic about the duration of the current market conditions than others, with one saying the favorable environment will stretch for at least another two years before reaching a “tipping point” where reinsurers must reduce their supply and shift toward repaying investors.

Reinsurers are now expected to compete on price to some extent for desirable transactions, but will place greater emphasis on competing on terms.

“Reinsurers will state their position on the value they add,” the source said, “but no one will say ‘go and invest your capital at any cost’.”

On the other hand, sources say buyers have “come to terms” with difficult market conditions but have somewhat more flexibility than last year when it comes to being selective with their reinsurance panels.

Guy Carpenter’s Priebe said cedents remain mindful of the need to diversify their reinsurance panels following the events of January 1, 2023, and as a result, many are turning to ILS solutions.

But he also suggested they would look for reinsurers offering “holistic” relationships across programs.

He predicts that competitive tensions will likely lead to greater differentiation among cedants. “Reinsurers will have to try harder to get signatures,” he said, adding that the talks will be “less about market discussion and more about individual relationships.”

A boost for mergers and acquisitions?

As competition among reinsurers intensifies, the pursuit of growth becomes increasingly difficult, especially when prices plateau or decline.

This could encourage some carriers to engage in mergers and acquisitions after a relative lack of such deals in the past few years, sources said.

At the same time, reinsurance M&A has been slow in recent years due to a lack of investor interest in the business, which has been driven by weak returns. There have only been two large-scale deals in the past five years: Validus’ acquisition of RenRe and Covea’s purchase of PartnerRe. A reversal in reinsurers’ fortunes from 2022 could make reinsurance a more attractive acquisition opportunity.

In particular, sources have pointed to the hybrid carrier reinsurance segments as potential takeover targets for companies looking to get into reinsurance quickly. It would also give hybrid carriers, accustomed to poor reinsurance performance, an opportunity to exit their positions.

“We don’t expect a wave of consolidation, but some of these unloved stepchildren may find new homes in the next two to three years,” they said.