Are underwriting margins about to peak for EU reinsurers?

Report from Fitch highlights balanced dynamics following renewals

Are underwriting margins about to peak for EU reinsurers?


By Kenneth Araullo

With the January 2024 renewals complete, what awaits European reinsurers’ underwriting margins in this “new world?”

Fitch Ratings has observed that reinsurers in the region were approaching the peak of their underwriting margins as of January 2024, suggesting a move towards a more balanced supply-and-demand dynamic.

This development aligns with Fitch’s previous forecasts that margins would see slight improvements before peaking in 2024, amid a slowdown in the property catastrophe market dynamics. The trend also mirrors the expectations set for an improved global reinsurance sector outlook this year.

The largest reinsurers in Europe, including Hannover Re, Munich Re, SCOR, and Swiss Re, successfully maintained significant enhancements in their program structures and terms achieved last year.

Fitch noted that their premium income growth outpaced that of 2023, largely fueled by volume rather than price hikes, indicating continued favorable market conditions for further profitable expansion.

Moderated adjustments despite substantial risk-adjusted inflation

Compared to the substantial risk-adjusted price increases in January 2023, the highest since the early 1990s, the current year’s adjustments have moderated. This change reflects improved technical profitability, although nominal price increases remain significant.

For instance, Swiss Re reported a nominal price increase of 9%, which was counterbalanced by an 11% uptick in loss assumptions, primarily due to inflation and casualty losses, resulting in a risk-adjusted price change of -2%, a shift from +5% in January 2023.

The favorable market environment facilitated robust growth in premium volumes, averaging 8.3% across these four companies, contrasting with flat premium volumes during the January 2023 renewals. SCOR experienced the most substantial growth, attributed to its focus on marine, engineering, energy, and alternative solutions sectors.

The renewal period highlighted a preference among reinsurers for property catastrophe, specialty lines, and customized solutions, with a cautious approach towards US casualty business impacted by high inflation on claims.

Despite varying strategies towards US casualty exposure — with Munich Re, SCOR, and Swiss Re reducing their exposure and Hannover Re maintaining its level — the reinsurers upheld their underwriting discipline, especially in natural catastrophe lines and on attachment points.

Renewal of retrocession covers was another common strategy among these firms, aided by an increase in availability and stable or slightly reduced risk-adjusted prices. Munich Re and SCOR expanded their retrocession coverage without increasing total costs, whereas Hannover Re slightly reduced its protection by lowering its “K-cession” securitization.

Fitch Ratings anticipates that strong underwriting profitability will continue to support reinsurers’ ratings throughout the year. Price levels and favorable terms are expected to offset the impact of high claims inflation.

Investment income is also likely to contribute positively to earnings, as reinvestment yields remain above average portfolio yields, underscoring a stable outlook for the sector.

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