Reinsurance competitive pressures to rise in 2027, discipline can keep returns attractive: AM Best

AM Best anticipates continued normalisation of reinsurance underwriting results through the rest of 2026 absent any major catastrophic losses, but anticipates competitive pressures will rise further next year as the market continues to build its capital base.

The rating agency has explained that discipline is in focus for the top 50 global reinsurance firms and believes this has been helping to maintain profitability for the cohort, in the currently softening marketplace.

Since the peak of the recent hard market, global reinsurance has “undergone a significant transformation” AM Best said in a report this week.

After years of struggling to meet its cost of capital, the global reinsurance industry restored profitability through hard market rates and underwriting discipline.

AM Best believes that this discipline persists, saying, “While material market softening occurred during the 2025 renewal season and into 2026, the structural changes from the hard market, including higher cedent retentions, improved risk selection, and reduced participation in lower layers of reinsurance towers, have largely remained intact.”

The resilience of those changes were tested by the California wildfires in early 2025, which helped sustain reinsurer profits.

While property catastrophe reinsurance rates have softened considerably since, it is the persistence of terms and conditions enforced during the hard market that now give AM Best some confidence on reinsurer’s being able to sustain their profits again in 2026, unless major loss events occur through the rest of this year.

Commenting on the recent mid-year 2026 reinsurance renewals, AM Best said, “The downward pressure on rates persisted, and June and July renewals continued the trend of increased leverage for cedents, with reinsurers maintaining sufficient capital to absorb losses.

“The renewal period saw additional softening in property catastrophe pricing, increased willingness to expand limits and provide broader coverage, and moderately more flexibility around terms and conditions than in recent renewals.”

Adding that, “Compounding this shift in market leverage is increasing competition from the ILS market.”

With no significant industry loss events through the first-half of this year, the rating agency noted that, “Reinsurers continue to accumulate capital in the current relatively high-interest rate environment, through profitable underwriting operations, and catastrophe activity that remains below long-term averages.”

AM Best did highlight the rising levels of severe weather losses in the United States that have been experienced in recent weeks, as well as wildfire activity in areas such as Washington.

“As 2026 continues to play out, the renewal seasons have painted a clear picture of the state of the market, which continues to transition from its period of rapid hardening to a more competitive, softening market. While rates continue to decline, the market overall remains favorable, though with fewer opportunities to deploy the substantial capital accumulated over the last few years,” AM Best said.

Fewer capital deployment options against a substantial and still-growing capital base means competitive pressures are likely to rise.

Recently, AM Best and Guy Carpenter estimated reinsurance capital will grow to $705 billion by the end of this year, with third-party and insurance-linked securities (ILS) capital making up around $130 billion of that.

AM Best explained, “Though the market may be seeing early indications of more normalized underwriting profitability, the industry’s capital position continues to strengthen. Record traditional and third-party capital is expected to sustain ample market capacity into 2027, increasing competitive pressures while still allowing well-disciplined market participants to generate attractive returns.”

Adding, “AM Best believes reinsurers will likely experience some deterioration in underwriting results between year-end 2025 and year-end 2026, due largely to rate declines, absent significant US catastrophe events during the second half of the year that might impact earnings. Additionally, it is AM Best’s expectation that growth in the market will continue its current weakened trend, as rates fall further and market players continue their commitment to enhanced underwriting discipline.”

“AM Best expects the World’s Largest Reinsurers report to continue to evolve, as more large reinsurance players adopt IFRS 17, global market dynamics evolve, and existing players make strategic changes to find growth and profitability as the reinsurance market continues through the current cycle and navigates new and evolving perils. Additionally, AM Best anticipates continued normalization of underwriting performance from the exceptionally strong results reinsurers produced between 2023 and 2025, as the current rate trend remains uninterrupted,” the rating agency concluded.