Global warming continues to drive up temperatures, stirring heavier storms, higher seas, and persistent droughts. That adds fuel to catastrophe losses worldwide.
Common sense would say reinsurance demand should keep rising. It has, somewhat, but the industry isn’t constrained by capital yet, so the cycle tilts in a different direction.
Morningstar’s equity research points straight at overcapacity as the bigger story in the medium term.
Their analysts see the market turning soft again, despite climate risks that, on paper, should support long-term growth.
The top 10 reinsurers control 69.4% of the market, equal to a Herfindahl-Hirschman Index of 586.3, which marks the sector as unconcentrated.
Low barriers keep new money flowing in, and fresh capital keeps eating away at pricing strength.
The property-casualty business runs on cycles. Since 2021 it enjoyed a hard stretch, with high demand and restricted supply pushing prices up and returns higher.
That usually attracts new entrants, which then drives margins down. Same movie again. Only this time, catastrophe bonds—slow to settle, often taking two years—blurred the rhythm.
Morningstar says the market peaked in 2023. The drag on profits won’t be fully visible for another year or two, but the fade is coming.
Premiums already point that way, and once they run off, earnings will start to stall. Falling interest rates, linked to easing inflation, will also bite into reinvestment yields.
Back in 2017, Hurricanes Harvey, Irma, and Maria ended the soft cycle. Yet bonds tied to those disasters dragged, leaving the true hardening delayed until 2019.
The heavy catastrophe year of 2021—Hurricane Ida included—accelerated the shift. Pricing power strengthened, returns spiked, and capital poured back in. By 2022, alternative capital had hit record levels, muting the hard market before it could fully stretch.
Morningstar analysts think the market has been through a strange, extended cycle. They count seven years of firming conditions, first gently between 2018 and 2020, then sharply after 2021.
That firm market is now slipping away. Reinsurance cycles, some argue, are getting longer. Maybe so. But according to Morningstar, the reset is already here, and the pressing issue is the return of soft pricing.
Losses from recent wildfires in California failed to offset the glut of available capital. And as global catastrophe losses fell from earlier highs, the market softened freely.
Morningstar expects reinsurers will face lower profits in the next two to three years, as the excess supply weighs more heavily than climate-driven demand.
