Alternative reinsurance capital and ILS market growth forecast for 2027: Fitch

Fitch Ratings anticipates the growth of the alternative reinsurance capital and insurance-linked securities (ILS) market will continue in 2027, as risk-adjusted returns remain attractive to investors and sponsor demand for capacity remains high, despite the backdrop of reinsurance rate softening.

Third-party capital in reinsurance, from alternative and insurance-linked securities sources, has continued to expand through recent years and is anticipated to reach a new high by year-end 2026.

In one of its pre-Monte Carlo Rendez-vous reports, rating agency Fitch says that the growth of the alternative capital and ILS sector is likely to continue next year.

The forecast from the rating agency comes against a back-drop of accelerating softening in the reinsurance marketplace, given an imbalance between excess supply of capital and modest demand growth.

But returns on equity for reinsurers and risk-adjusted returns for ILS or alternative capital providers remain attractive, while discipline remains and competition is seen as “mostly rational.”

Fitch Ratings does note that terms and conditions have “marginally loosened,” but believes that attachment points and retentions mostly held.

One of the big questions for the continued growth potential of ILS and alternative capital is how long discipline holds in the market and for now Fitch feels that all-important T&Cs in reinsurance are being sustained.

Capital levels in the insurance-linked securities market reached new highs in 2026 so far, with continued strong catastrophe bond market issuance and increasing activity in reinsurance sidecars, as well as the growth of casualty ILS.

“Fitch expects strong alternative reinsurance capital market growth and attractive risk-adjusted returns into 2027, with investor supply and sponsor demand well balanced,” the rating agency said.

The glut of capital from traditional reinsurance and ILS sources weighed on higher-layer property catastrophe rates at renewals and this drove the steepest price declines seen.

Fitch Ratings expects this dynamic will not change in the short-term, while the market remains free of significant loss events and capital continues to build.

As a result, the rating agency does believe that terms and conditions will remain under pressure, saying, “Terms and conditions in the property catastrophe market are likely to loosen further in 2027, with higher limits, broader event definitions, longer hours clauses and increased aggregate covers.”

In particular, Fitch has noticed rising availability of frequency and aggregate covers, with capital markets capacity often in support. But overall, even though the rating agency believes further softening will be seen at the January 2027 reinsurance renewals, it does feel returns can remain above cost-of-capital thanks to discipline in the market.

In retrocession, a similar dynamic is noted, with robust capital levels augmented by catastrophe bonds and sidecars adding to pricing declines.

Overall, the ILS market has continued to break records, particularly in the catastrophe bond market where issuance reached a new high in the first-half of 2026.

On where the continued expansion of alternative reinsurance capital and ILS will come from, Fitch noted that, “Strong supply from investors, including from alt IMs, will support this growth. Continued demand will also contribute, including from new sponsors entering the space and the expansion of non-peak perils such as wildfire, cyber and casualty risks.”

Adding that alongside the record cat bond issuance, “The ILS market also benefitted from steady sidecar capital. This includes longer-duration casualty risk, as alt IMs pursue high yields and diversification (non-correlating risk) from property catastrophe risk. These investors are typically larger and more sophisticated, with a longer-term focus, such as private equity, that can take advantage of float, often investing in higher-risk assets such as high-yield private credit.”

While ILS pricing and returns have been compressed by the growing capital levels, Fitch notes that returns for investors remain attractive, especially when the ILS asset class is considered against other assets and given the added benefit of significant diversification in the return-streams it provides.

“Increased capacity, with new transactions, reinvestment of robust returns back into the ILS market and growing sponsor participation, has resulted in catastrophe bond spread tightening, with pricing returning to 2021 levels.

“Nevertheless, risk-adjusted returns remain attractive relative to other asset classes, with double-digit returns anticipated in 2026 for the fourth consecutive year, as losses have been limited,” Fitch Ratings said.

At this stage of the reinsurance market cycle with additional softening expected, for the ILS and alternative capital markets the winners will be those that maintain their discipline, while also benefiting from origination routes and partnerships they have established in recent years.

Access to higher-quality investment opportunities, through partnerships, origination strategies and specialisms, can be a meaningful lever for ILS strategies. While so too can adopting a selective and disciplined approach at renewal time.

In addition, the ILS managers with thoughtfully constructed infrastructure and platforms can provide additional leverage to augment the returns of their strategies. Hence the work undertaken by many specialists in the ILS sector over recent years to establish efficient plumbing to connect their investor capital to risk, may now become more evident in the edge that can bring.