J.P. Morgan: Significant capacity remains for higher reinsurance attachments, even with inflation.

Equity analysts from J.P. Morgan recently visited companies in the London insurance and reinsurance market and observed that underwriters believe there is still considerable capacity in higher attachment points, despite inflationary pressures on losses.

Following their discussions, the analysts noted that while rates may be starting to decline, they remain at strong levels, supporting solid return on equity (ROE) prospects for at least the next couple of years. Although reinsurance pricing has softened in 2024, it is still considered “very healthy” overall.

The analysts highlighted that despite price adjustments, terms and conditions remain robust, and attachment points continue to be at favorable levels. They initially had concerns that inflation might have eroded the improvements in attachment points, but they left reassured that ample room remains before rising retentions become a significant issue.

As a result, J.P. Morgan’s discussions with London market participants indicated broad confidence in the continued availability of profitable underwriting opportunities. Analysts found near-universal agreement that, given the adequacy of current pricing, insurers and reinsurers still have room to expand their portfolios in 2025.

Their report also noted that while some attachment points are adjusted for inflation, the general upward inflationary trend has helped keep them relatively stable in nominal terms, as observed in the January 1st renewals. Even with some price softening, most attachment points remain at healthy levels.

Looking ahead to April 1st renewals in Japan and South Korea, analysts expected a continuation of January’s softening trend. However, in Japan, some layers have seen rate declines in the double digits, though overall, attachment points have largely held steady, with some adjusted for inflation.

In the U.S., analysts suggested that recent wildfires could slow price softening for mid-year renewals. With rate-on-line either stagnating or declining, underwriters must carefully account for inflation's impact on exposure to ensure attachment points remain adequate.

J.P. Morgan cautioned against allowing effective attachment points to decline simply as a means to sustain pricing levels, noting that similar trends during the early-to-mid 2010s led to increased probabilities of reinsurance layers attaching. While the market has so far remained disciplined, it is crucial to ensure that other terms and conditions are not relaxed to the extent that attachment risk rises unnecessarily.

Analysts emphasized the importance of considering inflation in all forms—both through exposure bases and economic factors that influence claim severity, rebuilding costs, and loss development. While headroom in attachment points currently exists, there is no guarantee it will persist if competition intensifies and the market prioritizes volume over profitability in future renewals.