Analysts at Jefferies, a US-based investment bank, have predicted that the decline in reinsurance prices may slow down by 2028, but the market is unlikely to stabilize before 2030. They expect the rate of price decline to accelerate in 2027 before slowing down the following year. This forecast contrasts with the expectations of reinsurance companies, which anticipate a slowdown in price decline during the 2027 renewal period.
Jefferies' analysts have expressed concerns about the price decline, citing the influx of capital from third-party investors as a major factor. They note that this trend is similar to what occurred in the US property catastrophe reinsurance market in the 2010s. At that time, prices declined first, followed by a shift in focus to terms and conditions. The analysts expect a similar shift to occur in the reinsurance market, with a greater emphasis on terms and conditions as prices decline.
The reinsurance market has experienced significant changes in recent years, with the capital from third-party investors reaching record levels. Rating agencies AM Best and Moody's have identified this capital as a primary driver of the current soft market. The growth of insurance-linked securities (ILS) has also contributed to the market dynamics. Jefferies' analysts note that ILS capital has been particularly prominent in higher layers of property catastrophe reinsurance.
Despite the challenges posed by the soft market, Jefferies' analysts believe that traditional reinsurance companies have tools at their disposal to mitigate the impact of price decline on their earnings. One such tool is the release of accumulated reserves, which can help to support revenue and profitability. The analysts cite Munich Re as an example of a company that may use this strategy to manage the impact of price decline.
The analysts emphasize the importance of discipline in the reinsurance and ILS markets, given the abundance of capital. They suggest that a selective approach to deploying capacity may become increasingly important in the coming years. Jefferies' analysts also note that external factors, such as large insurance losses due to catastrophes and geopolitical developments, can influence the direction of the reinsurance market.
The current market dynamics have some similarities with the reinsurance market's performance during the 2010s, but the future trajectory will depend on the development of losses and the ability of reinsurance companies to maintain underwriting discipline and manage capital. Jefferies' analysts stress that the market's path will not be determined solely by prices, but also by external factors.
Overall, Jefferies' analysts expect the reinsurance market to continue experiencing price decline, but at a slower pace by 2028. They predict that the market will stabilize by 2030, but emphasize that this will depend on various factors, including the development of losses and the ability of reinsurance companies to adapt to changing market conditions.
Key points
- Reinsurance prices are expected to decline until 2028 before stabilizing by 2030.
- The influx of capital from third-party investors is driving the price decline.
- Reinsurance companies have tools, such as accumulated reserves, to mitigate the impact of price decline on their earnings.
