AM Best: Global reinsurance now has 'more-durable market structure' amid strong capital, profits

By Keira Wingate

Aug 14 - (The Insurer) - AM Best has reaffirmed its outlook on the global reinsurance sector, citing robust capitalization, sustained underwriting profitability and a surge in investment income, even as (re)insurers navigate heightened natural catastrophe losses, social inflation and geopolitical uncertainty.

The landmark January 2023 renewals marked a decisive shift in global reinsurance, triggering a broad reshaping of how risk is priced, shared and retained, according to an AM Best segment report.

"A recalibration of the global reinsurance market since the January 2023 renewal period has led to a more-durable market structure characterized by reduced earnings volatility and stronger margins, supporting AM Best’s continued positive outlook on the industry," the rating agency said.

Property catastrophe lines had higher attachment points, tighter terms and conditions and across-the-board rate hikes, changes that carried into the 2024 renewals. These structural adjustments reduced earnings volatility and boosted margins across the sector.

In 2024, the European "Big Four" reinsurers (Swiss Re, Munich Re, Hannover Re and Scor) reported a discounted combined ratio of 86.4% under IFRS 17, with discounting trimming roughly eight percentage points from the combined ratio.

U.S. and Bermuda reinsurers posted an undiscounted combined ratio of 89.5% under U.S. Gaap. These results highlight a rebound in underwriting profitability, particularly in property treaty portfolios, supported by disciplined capacity deployment and a strategic retreat from working layers.

Casualty reinsurance has provided topline growth but added complexity, with reserve releases declining and prior-year development essentially flat in 2024. In response, many reinsurers have rebalanced their portfolios toward higher-quality cedants and exited high-risk casualty lines such as U.S. commercial auto, general liability and umbrella, maintaining underwriting discipline even amid signs of rate moderation.

The majority of global reinsurers maintained strong performance through the first half of 2025, despite global natural catastrophe-related insured losses reaching almost $100 billion. The California wildfires accounted for most of the losses, which ranged between $30 billion and $50 billion.

Assuming no further significant catastrophe events during the second half of 2025, disciplined underwriting, rate adequacy and investment income should help limit volatility.

RECORD BREAKING CAPITAL

The global reinsurance industry entered 2025 with record capital levels, reaching approximately $500 billion by the end of 2024. Capital growth occurred in the absence of major new reinsurance startups, which typically occur in a hard market environment. Instead, established reinsurers retained earnings and optimized balance sheets.

The insurance-linked securities (ILS) market also reached new heights, hitting $107 billion at the end of last year and is expected to continue growing on the back of the catastrophe bond market, which hit an all-time outstanding balance of $52.7 billion in the first half of 2025.

The ILS market is experiencing reduced trapped capital due to the higher attachment points achieved by the overall reinsurance market, along with tighter terms and conditions that have shifted in favor of investors, AM Best said.

DEMAND FOR REINSURANCE

Demand for reinsurance continues to grow, driven by heightened catastrophe losses, increasing insurance-to-value ratios and continued economic and political unrest.

Additionally, climate change has intensified secondary perils, such as severe convective storms, making them more frequent. Furthermore, social inflation continues to drive up casualty claims, prompting cedants to seek increased reinsurance protection.

On the supply side, capacity has grown since 2022, but reinsurers have deployed it with caution.

The January 1, 2025, property casualty renewals exhibited a bifurcated pattern: loss-free programs had risk-adjusted rate reductions of 5% to 15% while loss-impacted segments experienced increases of up to 30%. Terms and attachment points largely held firm, helping preserve profitability.

Unlike hard markets driven by capital shortfalls, this cycle reflects years of subpar returns, prompting more selective capital use. The lack of new entrants suggests that structural discipline may be taking hold, potentially avoiding the sector's past boom-and-bust episodes.

A LEAP IN AI TECHNOLOGY

Reinsurers are embracing technological innovations to enhance risk management and underwriting quality. Advancements in AI, machine learning and data analytics are transforming how reinsurers evaluate exposures, monitor accumulations and adjust pricing models.

These AI-driven platforms allow reinsurers to process massive, multi-source datasets and extract insights, which was not possible a few years ago. After each catastrophe, firms can use machine learning to calibrate models with updated claims and exposure data.

In casualty, similar tools are being used to analyze litigation trends, identify nuclear verdict risk and refine assumptions about claims severity.

Moving forward, AI can help address the lagging development of casualty ILS, which has yet to achieve the same scale and investor confidence as property catastrophe ILS products.

PERSISTENT STRAINS

Concerns regarding adverse development in the U.S. casualty books persist for global reinsurers, AM Best said.

A majority of reinsurers reported favorable prior-year development over time, as strong favorable development on property and specialty lines of business offset the strengthening of casualty reserves. However, the industry remains challenged by unpredictable jury awards, broader interpretations of liability and a lack of meaningful tort reform.

In response, reinsurers have pushed for price increases, stricter terms and targeted capacity reductions. Even so, structural problems remain unresolved and capacity reductions have not reached the scale needed to force political or legal reform.

Investor appetite for casualty remains strong, given its lower correlation to property catastrophe risk and the ability to invest float over long horizons. Historically, casualty-focused reinsurers have traded at higher price-to-book multiples than their property-focused reinsurers. This trend has become more pronounced in recent years due to the growth of Japanese (re)insurance groups.

If legal and social trends fail to stabilize, casualty reinsurance could hit a tipping point where pricing no longer compensates for volatility.

LIFE REINSURANCE STABILITY

Life reinsurance, predominantly in the U.S. market, remains a steady source of diversification and earnings stability for the big four reinsurers, AM Best said. Margins typically run between 5% and 10%, helping reduce the volatility inherent in reinsurers' earnings.

Post-Covid mortality rates were higher, but reinsurers expect experience to revert to historical norms, with higher-quality new business offsetting adverse trends in some back books.

CONTINUED GEOPOLITICAL CONCERN, PRIVATE CREDIT CRYPTO REGULATION

Conflicts and trade wars pose a threat to capital market stability and global economic growth, potentially leading to higher inflation and supply chain disruptions, which can lead to capital market volatility and negative impacts on investment portfolios.

Nevertheless, global reinsurers are well-positioned to manage near-term volatility.

In the private credit sector, reinsurers are increasingly exploring this asset class in search of yield. However, the market is opaque, with limited liquidity and inconsistent valuation standards.

Many private credit borrowers don't fit into the traditional banking system due to their size or credit quality, and they have yet to experience something as drastic as the 2008/09 financial crisis.

While private credit offers attractive returns, AM Best said that reinsurers should be cautious, selective and risk-aware.

In the crypto industry, regulatory frameworks are taking shape. Bermuda licensed the first bitcoin-only life insurer in 2024 and the Cayman Islands will require crypto service licensing from April 2025.

In the U.S., the July 2025 Genius Act introduced the first federal stablecoin rules, aiming to bolster consumer protections and market stability. While digital assets remain outside of reinsurance portfolios, the growing infrastructure and regulation suggest they could intersect more with traditional markets in the coming years.