Equity analysts at UK investment bank Peel Hunt said they have factored in the potential for reinsurance rates to decline circa 35% over the next five years, explaining that it has factored a softening cycle into its outlook for the reinsurers it covers.The analysts said they believe they have been prudent in terms of the quantum of anticipated rate softening for reinsurance, so will fine tune their estimates over the coming years.With the global reinsurance market having seen a shift to a softening cycle in property catastrophe risks at the January 2025 renewals, the analysts appear to believe this could be just the start.Analysis by the Peel Hunt team found that property catastrophe reinsurance rates fell by an average of circa 9% at the renewals, which they base on the range of estimates provided by brokers in recent days.

Recall that .While that broker also said property catastrophe reinsurance rates declined across the globe, with its indices falling by , by 6.2% for the US, and by .Howden Re, meanwhile, estimated that .

, citing US property catastrophe treaties renewing between flat and down 10%, while Australia saw loss-free treaties declining as much as 7.5%, and Korea saw some declines of as much as 25%.But on the other hand, US rates-on-line rose by as much as 15% for loss impacted treaties.The analysts from peel Hunt note that the decline, averaging around 9%, was greater than they had anticipated.

Although noting that the premium impact of these rate declines has likely been offset in part by exposure growth, while also saying that property catastrophe rates remain adequate being still 60% above the trough of 2017.In addition, Peel Hunt’s analysts also note that with retrocession rates seeming to have softened further, “the net impact on underwriting margins is closer to 7% – 8%.” On how this affects the reinsurance firms under their coverage universe, the analysts said, “We anticipate the impact of the 1 January 2025 renewals on our coverage universe will depend on 1) changes in exposures, 2) whether exposures are weighted to the US or Europe (most of our coverage universe is overweight in the US commercial market), and 3) how diversified the reinsurance book is.Additionally, the rates above are on a loss-free basis.

We estimate reinsurers more exposed to loss-hit accounts will have been able to push through rate increases, mitigating the decline.” The analysts highlight that reinsurers increased their capital deployment and exposures at the renewals, being one reason for the softening.They explained, “At this year’s renewals, traditional reinsurers increased capacity, outstripping the ongoing rising demand for cover from cedents.In 2024, supply and demand were balanced, while in 2023, there was a shortage of reinsurance capacity.

We estimate that most of the increase in capacity has been allocated to Property and Specialty classes, while Casualty remains relatively stable amid ongoing concerns about US Casualty price adequacy and reserve quality across primary carriers.“Importantly, reinsurers maintained overall underwriting discipline, with attachment points largely unchanged.Primary insurers continue to increase reinsurance limits to offload more tail-risk to the reinsurance industry.

However, primary insurers were less successful in persuading reinsurers to hedge their lower-layer frequency exposures in the US, though they were slightly more successful in renegotiating attachment points in Europe, where some brokers suggest leading reinsurers were defending their market share.” Citing “signs that the cycle has peaked,” the analysts also said that “Nevertheless, rate adequacy remains very attractive, and reinsurers continue to deploy capital.” So this gives you an idea of what one equity analyst team are anticipating for reinsurance pricing over the coming years.A lot can change of course and the market remains finely balanced, so any elevation of loss trends could change the outlook direction, we suspect.But, as we’ve been explaining in our coverage, investors in reinsurance, catastrophe bonds and insurance-linked securities (ILS) will be watching the direction of rates and pricing closely over the coming years.

While at this stage they remain at historically very attractive levels, there will be some scrutiny on the reinsurance renewals ahead, as investors on both traditional and alternative capital sides watch to see how disciplined market participants are in this new softer phase of the industry cycle.Of course, pricing is just one piece of the equation, so investors will also be watching for signals on efficiency and cost of capital, as well as how contract terms, conditions and perhaps most importantly attachment points develop over the coming year...

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