Balancing capacity and demand in property retro markets: 2025 outlook

As we approach the end of the year, the property catastrophe (cat) and retrocession (retro) markets remain under pressure. While new capital has entered the market, the balance between capacity and demand continues to be tight, particularly in the retro space.

Despite discussions of new capital, much of it is tied to existing players and the impact of new entrants has been limited. While capacity has increased modestly, it has not alleviated the persistent demand for property cat reinsurance. Many major global buyers are seeking to increase their purchases, especially at higher layers. It is estimated that this could add as much as $25 billion in additional capacity requirements, further stretching the market.

One of the main drivers of this demand is inflation, which has increased both asset values and the cost of rebuilding or repair. This puts additional strain on the reinsurance supply chain, making retro markets an even more critical component. Additionally, evolving loss patterns linked to climate variability are further complicating the risk landscape, pushing demand higher and increasing the complexity of reinsurance placements. According to Verisk’s 2024 report, the average annual loss (AAL) from global natural catastrophes is estimated at $151 billion[1]. This rise is notable; as inflation and climate-related factors continue to reshape the risk landscape, they continuously challenge reinsurance attachment levels.

Retro markets: Stabilising, but still under pressure

Retro markets, which play a crucial role in protecting reinsurers, have seen increasing demand as reinsurers seek more cover for their exposures. With reinsurers writing more business and taking on greater risks, retro capacity has become a vital part of their balance sheet management strategy. Spot purchases initiated by hurricane forecasts in Q2 2024 are a clear indicator that reinsurers are not protected to comfort levels and that the actual demand for capacity goes beyond current placements.

While there has been significant cat activity impacting the reinsurance market in 2024, the retro market has been relatively unscathed. This is due to a lack of global-scale catastrophe so far this year and is helping to stabilise pricing in a neatly balanced but fragile market. Hurricane Milton has not materialised as a direct hit on Tampa Bay but could have been the scenario that drastically impacted both retro and reinsurance markets, pushing retro capacity back into distress as ILS capacity gets trapped and traditional capital reduces.

The importance of underwriting discipline

In the face of challenging market conditions, maintaining underwriting discipline has been crucial for navigating the complexities of 2023. During a period when capacity was particularly constrained, we continued to support our clients while adhering to strict underwriting standards. This approach has not only preserved our capital base but has also fostered long-term relationships built on trust and reliability.

As new capital enters the market, we must resist the temptation to relax underwriting terms and conditions in exchange for short-term gains. Underwriting discipline remains essential, especially as inflationary pressures and the unpredictable nature of climate-driven risks continue to shape the market.

The growing complexity of climate-driven risks

The impact of climate change on property cat markets cannot be understated. As climate events increase in frequency and severity, reinsurers are dealing with unpredictable loss patterns. Events such as unexpected floods in Brazil, or the Calgary hail in Canada this year are becoming more frequent. These so-called “secondary perils” are now primary drivers of losses in many regions.

Moreover, the protection gap – the difference between insured and economic losses – continues to widen in emerging markets, where insurance penetration remains low. This gap poses a significant challenge for governments and the industry alike. Addressing it will be key to managing the growing risks associated with climate change and ensuring broader resilience to future catastrophic events.

Cautious optimism ahead

Looking ahead to 2025, we anticipate some pricing normalisation, particularly if benign loss conditions persist. However, inflationary pressures, rising asset values, and severe weather patterns continue to drive demand. Against this backdrop, markets will remain critical to reinsurers’ ability to manage these risks, but discipline must remain a priority.

The potential for large losses looms, especially in high-risk regions such as the U.S. and Europe, and a major catastrophe could quickly tip the balance, tightening retro capacity and putting pressure on both reinsurers and ceding companies.

At LM Re, our focus remains on disciplined underwriting and consistent capacity, ensuring we can support our clients through market fluctuations. We will continue improving data capture and encouraging transparency between us, our clients and broking partners, going beyond modelled perils and regions to enable us to assess the full range of exposures we are assuming. By maintaining a long-term view and managing risk carefully, we are well-positioned to navigate the uncertainties ahead.

[1] https://www.verisk.com/resources/campaigns/modeling-insured-catastrophe-losses-a-global-perspective-for-2024/