Several German and French insurance groups have entered the reinsurance market to expand their operational scale and diversify income streams, according to a new analysis by Fitch Ratings.
While this move could enhance credit profiles by increasing resilience and revenue diversity, the agency also highlights that execution risks and earnings volatility pose significant challenges.
The Fitch report evaluates eight Western European insurance groups that have integrated reinsurance into their operations, either through organic growth or acquisitions.
Fitch notes that the structural differences between primary insurance and reinsurance, particularly the business-to-business nature of the latter, require strong underwriting capabilities and experienced personnel to manage risk effectively.
Fitch’s analysis suggests that expanding into reinsurance can improve a group’s business profile by reducing dependency on existing revenue sources. This form of diversification can help mitigate the effects of market shocks and broaden income stability over the long term.
However, Fitch also cautions that excessive premium growth – especially if it outpaces the market – may signal future financial stress and is closely monitored in its credit assessments.
A critical factor in the success of reinsurance expansion is the ability to retain or attract underwriting talent, particularly when entering emerging markets. Fitch emphasized that the effectiveness of integration strategies – whether through acquisition or internal buildout – can materially influence the acquiring group’s financial outcomes and credit ratings.
The strategy of growth from reinsurance expansion is not without merit, as a recent report from Fitch also outlined that the four largest European reinsurers – Munich Re, Swiss Re, Hannover Re, and SCOR – reported an average return on equity (ROE) of 13.7% in 2024, down from 17.1% in 2023.
The results were supported by continued strong performance in property and casualty (P&C) underwriting and investment income, marking the second consecutive year of elevated margins in a favorable reinsurance pricing cycle.
That said, while capital adequacy remained strong across the peer group, heightened macroeconomic and geopolitical uncertainty could present headwinds in 2025.
Reinsurance earnings tend to be more volatile than those of primary insurers due to cyclical market conditions. Between 2019 and 2023, Fitch observed that the average gross combined ratio for reinsurance operations among the peer group fluctuated between 93% and 103%, compared to a more stable 96%–98% range for their primary insurance counterparts. This earnings volatility can introduce additional risks to overall profit stability.
Exposure to natural catastrophe (nat cat) events is typically higher for reinsurers, which carries implications for capital adequacy under Fitch’s proprietary Prism Global model. Reinsurance accounted for an average of 18% of total premiums across the peer group.
In general, most reinsurers did not significantly affect their group’s capital requirements, though Hannover Re was noted as an exception, with its reinsurance operations comprising 60% of its parent group's premiums.
Fitch said that the impact of reinsurance expansion on capitalization depends heavily on both the size of the reinsurance portfolio and the degree of exposure to nat cat risks. These exposures result in higher capital charges under Prism, potentially reducing overall capital strength.
Financing methods for entering the reinsurance market vary and include both organic investment and mergers and acquisitions. Fitch’s report outlined that different approaches to funding such ventures carry distinct credit implications, and the choice of strategy can influence a group’s balance sheet and long-term financial flexibility.
While reinsurance offers opportunities for top-line growth and broader income diversification, Fitch said that successful integration and prudent risk management are necessary to ensure these benefits translate into stronger credit profiles.
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