Reinsurance inflection – Key question is whether irrational competition emerges: AM Best

The global reinsurance market is at an inflection point after consecutive strong year’s of underwriting returns have driven robust capital generation, while inflows continue to grow the insurance-linked securities market and alternative forms of capacity, which leads AM Best to call this an inflection point and ask if pricing discipline will last.

With reinsurance capital across the market now at record levels, the rating agency says the key question is, “whether reinsurers can maintain underwriting discipline or will irrational competition emerge leading to another traditional soft market cycle.”

Unlike previous hard market cycles, capital accumulated to incumbents rather than a wave of start-ups, as supportive market conditions continue to drive favourable earnings generation for reinsurers.

At the same time, routes to market have expanded, with the incumbent reinsurance sector companies now having “multiple opportunities through which capital can be deployed,” AM Best explained, adding that  this reduces the need to pursue growth through a single underwriting channel.

AM Best’s concerns related to market discipline extend further than just property catastrophe reinsurance, it stated in a new report today.

The company notes that casualty reinsurance is another area where market conditions are “one of the industry’s most important strategic concerns.”

Some are growing in the casualty space, while others are more cautious, given ongoing uncertainty around social inflation, litigation funding, the size of jury awards and escalating adverse legal environments.

“Casualty exposures often develop over many years, meaning that decisions being made today may not be fully understood until well into the next decade,” Dan Hofmeister, director, AM Best explained.

“Consequently, maintaining pricing discipline in casualty business may ultimately prove as important as preserving discipline within the property catastrophe market.”

AM Best highlighted the growing investor interest in casualty-linked structures in the insurance-linked securities marketplace, but noted that, “the attractiveness of property catastrophe ILS has proven difficult to replicate within casualty business.”

Favourable earnings profile could persist for reinsurance players barring an outsized catastrophe event, but the most important question is whether reinsurers can maintain their pricing discipline, the rating agency said.

“If underwriting discipline and pricing integrity can be maintained despite record levels of capital, the industry may indeed be in the midst of a meaningful evolution of the reinsurance market. If not, history may once again demonstrate that the fundamental dynamics of supply, demand, and competition remain remarkably persistent,” added Michael Lagomarsino, senior director, AM Best.

AM Best stated in a report released today, “The next twelve months may ultimately determine whether the market is entering a new era of sustained underwriting discipline or continuing down the path of yet another traditional soft market cycle. The question is hardly a new one. Throughout the past two decades, the reinsurance industry has repeatedly debated whether structural changes would permanently alter the traditional underwriting cycle.”

Discussions like this occurred during the period when we saw a wave of reinsurance start-ups, such as with the Bermuda companies of 2005, as well as during the rapid expansion of the ILS market and third-party capital after the financial crisis.

“While each period introduced meaningful changes, history ultimately demonstrated that cycles remained present, albeit in evolving forms,” AM Best said.

While property catastrophe reinsurance pricing has retreated back to around 2022 levels, AM Best does note that its hard to assess how close pricing actually is, given the more stringent terms and conditions reinsurers have been able to hold onto so far as the market softened over the last few years.

While terms and important attachment points have largely held firm, AM Best notes, “Reinsurers now face a different challenge compared to two years ago. The industry faces an abundance of capital and relatively few areas where additional capacity can be deployed with acceptable risk return trade-offs.”

Reinsurers have more options available, from diversified business models, to expansions into primary lines, as well as their alternative capital businesses.

Which leads AM Best to say that, “The significance of the current moment is difficult to overstate. Should reinsurers successfully maintain underwriting discipline despite record capital levels, it would represent evidence that the industry’s structure has fundamentally changed. If not, the market may simply be unable to resist the competitive temptations that growing capital brings.”

The most important question is whether discipline can be maintained, and on that AM Best states, “The answer will shape not only the next renewal season, but potentially the future structure of the reinsurance market itself. The reinsurance industry has spent much of the past thirty years adapting to structural changes that many believed would fundamentally reshape market behavior. The emergence of alternative capital, the growth of managed capital platforms, increasingly sophisticated catastrophe modeling, expansion into primary insurance markets, and greater diversification of business models have all challenged traditional assumptions regarding underwriting cycles.”

Despite these developments, reinsurance market cycles have not disappeared, but the rating agency does believe they might have changed, to become more localised, product specific and influenced by capital market dynamics.

“The industry’s history suggests that predictions regarding the end of underwriting cycles should be approached with caution,” AM Best concluded.

Of course, we’ve been here before in previous reinsurance cycles and this sets the stage well for the upcoming conference season and events like our upcoming Artemis London 2026 cat bond and ILS conference which is shortly after followed by the Monte Carlo Rendez-vous event.

Market participants are going to face reinsurance buyers looking for more from their relationships, while capital providers are likely to prove determined not to give away too much more of the economics of their underwriting.

At the same time, adoption of ILS structures like catastrophe bonds and sidecars continues apace in reinsurance and buyers are likely to recognise the benefits of long-term partnership capital which suggests those trends are unlikely to reverse at this time.

How much continued growth is seen in the ILS market remains to be seen and a critical factor in determining that will be just how competitive the large global reinsurers prove to be in 2027.

Competitive tendencies will continue to apply pressure we suspect, as the market is not expanding the underwriting opportunity at a sufficient pace to absorb the growing capital-base. Which is where discipline and reinsurer / protection buyer optionality may prove key, in reducing the pressure on key areas like property catastrophe risks.

Also read: Third-party reinsurance capital projected for 6% growth to $130bn in 2026: AM Best & GC.