Reinsurance growth expectations reset higher as market recalibrates on losses: Berenberg

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As the global reinsurance industry absorbs the realisation that the California wildfires have driven a particularly costly start to the year, analysts at investment bank Berenberg say this may recalibrate expectations for catastrophe losses across the insurance sector, leading to higher growth expectations among reinsurance capital providers.

The analysts refer back to AIG CEO Peter Zaffino’s comments from last week, when he forecast that the wildfires could push annual insured catastrophe losses above $200 billion this year, which would be a record burden for the sector and some 20% or more higher than seen in 2024.

Capital management activity may slow somewhat, the Berenberg analysts believe, as reinsurance firms look to keep capacity in reserve.

In addition, the analysts forecast increased pricing at property catastrophe reinsurance renewals in June and July.

But, in addition, the analysts also believe we could see a “reset of growth expectations as the industry adjusts to an increased likelihood of tail events.”

“Reinsurance is an industry in which pricing largely follows rather than anticipates losses. We believe this trend will continue in 2025, and will likely lead to an acceleration in the risk-reward of the reinsurers that we follow,” the analysts explained.

Losses of the scale of the Los Angeles, California wildfires will “lead to more premium growth to cover the increased exposures,” the analysts believe, highlighting that other major US insurers are now likely to look for more reinsurance protection.

They also highlight AIG’s sophisticated use of reinsurance and third-party capital, which helps to moderate its catastrophe loss exposure, saying other insurers will likely be watching how the losses from the fires fall and look to emulate those better protected.

Which is likely to result in an increase to reinsurance demand something a $200 billion loss year would only stimulate further.

We’ve witnessed more reinsurance buying in the last few years anyway, in part as buying lower-down and on an aggregate basis became more challenging and costly, pushing cedents to buy more limit higher-up in some cases.

Part of this is a dynamic that emerged due to the realisation terms needed to change, but also the rising cost of severe weather and natural catastrophe losses.

As catastrophe loss expectations for the industry keep rising, remember $100 billion was only cited as a “new normal” back in 2023, and then by 2025 it’s $150 billion that is approaching as an annual average, insurers and reinsurers are learning how to adapt their risk appetites, capital and protection to weather such high levels of losses year after year.

Berenberg’s analysts believe the rise in reinsurance demand is likely to persist as the industry adapts to higher catastrophe loss expectations.

Alternative capital may threaten the profitability of reinsurers, the analysts believe and they caution that lower interest rates that encourage pensions to deploy more capital to reinsurance is the main threat to their thesis of a demand driven run of profits for reinsurers.

With traditional re/insurers taking advantage of the appetites alternative capital providers have for reinsurance right now, there is a chance of more equilibrium being found than has been experienced in the past. This time might be different, but whether that equals more alignment or more competition remains to be seen.

The analysts believe that terms and attachments will remain at their firm and higher levels through 2025, as the industry adapts to the reality of what could be a costly year ahead.

“If, as we believe is likely, the reinsurance cycle stays harder for longer, then the reinsurance earnings will surprise positively and we will see further strong share price performance for the reinsurers in future,” the analysts state.

Reinsurance growth expectations reset higher as market recalibrates on losses: Berenberg was published by: www.Artemis.bm
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