The reinsurance market is maintaining structural discipline at this time, with the lack of meaningful new entrants seen as one driver.But rating agency AM Best has asked today whether the stronger foundations of the industry can prove durable this time, while also noting that the structural reset has benefitted ILS investors as well.The reset and recalibration of the reinsurance market that happened after 2022 has “led to a more-durable market structure characterized by reduced earnings volatility and stronger margins,” leading AM Best to keep its positive outlook on the industry at this time.The reset, or shift in reinsurance risk sharing, which has seen prices rise, terms and conditions toughened, and attachments raised, continued for a second year in 2024, driving strong profits for the sector.

Those strong profits have also driven a build-up of capital in the reinsurance market, while at the same time the insurance-linked securities (ILS) market has also expanded, especially in the catastrophe bond market where new records have been set, AM Best noted today.“Reinsurers’ risk-adjusted capitalization levels remain robust, reflecting retained earnings and disciplined capital management, and the strong underwriting profitability is being augmented by a surge in investment income given elevated interest rates,” Michael Lagomarsino, senior director, AM Best explained.Going on to state that, “The absence of material new global reinsurance entrants also is ensuring that structural market discipline is maintained, distinguishing the current environment from previous market cycles.” At this stage of the year, AM Best also notes that 2025 could be a third profitable year for the reinsurance sector, depending on how the coming months and in particular the hurricane season pan out.

“Assuming no further material weather events in the second half of 2025, the combination of disciplined underwriting, rate adequacy and robust investment income should deliver full-year operating results exceeding the cost of capital,” explained Dan Hofmeister, associate director, AM Best.But global reinsurers are not without their challenges, as headwinds continue to be faced, including climate change, social inflation, rising geopolitical risks and trade disputes.AM Best said, “These challenges underscore the importance of the market’s improved structural foundations and explain why AM Best’s outlook, though positive, remains closely scrutinized.” “The question now facing the industry is whether the improvements in terms and conditions represent a durable shift,” Steven Chirico, director, AM Best highlighted.

Adding that, “The lessons of past cycles suggest caution, but reinsurer sentiment has ensured tighter exposure management and market disciple in the current cycle.” At this stage of the year, while pricing has been softening the reinsurance and ILS market have largely retained the higher attachments and tighter terms that had been imposed in the reset that began at January 2023 renewals.There has been more appetite for frequency risks, with more capacity deployed to help clients with frequency loss issues through aggregate covers.But in general, the market remains satisfied with where attachments and terms have remained, so far.

AM Best and reinsurance broker Guy Carpenter previously reported that Today, AM Best said, “The expansion of the ILS segment is primarily due to investor appetite for robust returns and well-defined remote risks.“Overall, the ILS market has been experiencing reduced trapped capital because the higher attachment points achieved by the overall reinsurance market and tighter terms and conditions (including terms of capital release) have moved in favor of investors.” This is a critical point, , that the terms of capital deployment are now more equitable between ILS funds and their counterparties, which has helped to minimise trapped capital risk.While at the same time, more trapped capital has been released and is now available to recycle into underwriting new risks.

All of which has served to make the ILS market an increasing force in reinsurance over the last two years, which perhaps gives even more weight to an optimistic view that this discipline can continue to be maintained, as the industry recognises the importance of contract structure even while pricing has softened..All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance can be accessed online.Our can be subscribed to using the typical podcast services providers, including Apple, Google, Spotify and more.