The reinsurance market cycle has become more subdued thanks to sound risk management practices, strategic use of technology and a maturing partnership with alternative capital (ILS), according to rating agency AM Best.Commenting this morning on the fact reinsurance firms met their costs of capital for the second year in a row in 2024, AM Best highlights the maturing relationship between traditional and alternative or insurance-linked securities (ILS) capital as helping to drive a less volatile market cycle.It’s all about adopting flexible strategies that allow reinsurance companies to manage their risk appetite through the cycle, while delivering on client promises and expectations, weighing opportunity with the need to be disciplined and embracing modernisation, alongside efficient capital, to deliver above cost-of-capital returns through the cycle, AM Best’s latest report suggests.According to AM Best, the cost-of-capital of the reinsurance industry has declined in recent years and while the rating agency does not explicitly state it, the use of ILS and alternative capital is certainly a factor in that.

AM Best noted that the weighted average cost of capital of the reinsurance industry has been volatile, but dipped to 7.66% in 2024, down from 8.1% in 2023 and then fell further still in the first quarter of 2025, to 6.66%.A decline in the cost-of-capital of the reinsurance industry should be viewed as positive, as it perhaps indicates increasingly efficient business models and capacity deployment, which is beneficial to the customer and the ultimate cost of insurance for consumers, while also meaning reinsurers stand a better chance of their returns exceeding costs of capital even as reinsurance rates soften.The recent repricing and derisking of portfolios has also made a significant difference to reinsurers ability to generate returns that exceed cost-of-capital, so all taken together this does imply a more efficient marketplace and one that can sustain a softer rate environment, to a degree.

“The current hard market conditions in the reinsurance segment are being driven primarily by the memories of historical prolonged underperformance, compounded by the abundant capital due to the extended low interest rate environment,” explained Helen Andersen, industry analyst, AM Best.“Reinsurers have also implemented thorough derisking measures, such as tightened terms and conditions and a sharp increase in attachment points, which are unlikely to be loosened,” added Sridhar Manyem, senior director, industry research and analytics, AM Best.Even after the decline in reinsurance pricing seen this year, rates are still up around 90% on 2017, AM Best highlights.

“Market conditions indicate more sustainable pricing momentum, enhancing reinsurers’ ability to meet their cost of capital over the medium term,” the rating agency said.Even in a world of higher natural disaster losses, AM Best still believes the reinsurance industry can deliver.“Despite catastrophes such as the California wildfires, reinsurers that balance long-term strategies with effective tactical decisions and sound risk management are firmly poised to meet market expectations in 2025,” AM Best explained.

Returns-on-equity have been higher for the reinsurers since 2023, resulting in them beating cost-of-capital for the second year in a row in 2024.AM Best believes the trend can continue, dependent on major loss activity, but it noted, “The exceptional ROE in 2023 is unlikely to be repeated, although reinsurers are expected to maintain underwriting discipline over the near term.” Not all reinsurance firms will look the same though, as the rating agency highlights that, “Reinsurers look to optimize their cost of capital and maximize their returns while taking risks commensurate with their risk appetites.Significant volatility in returns can indicate inefficiencies with regard to managing risk, resulting in a higher cost of capital.” Our feeling at Artemis is that the role of alternative capital, from third-party investors and largely supplied using insurance-linked securities (ILS), is likely a meaningful factor in the ability of some reinsurers to beat cost-of-capital nowadays.

The aligned, partnership model some companies are adopting provide them with additional underwriting firepower, risk management capacity, leverage for their own balance-sheet capital, portfolio optimisation optionality and not to mention the meaningful fee income some are earning.Measuring the effect use of third-party and ILS capital is having on reinsurance firms ability to deliver profitable performance through the cycle is no easy task, but it feels like one the rating agencies should be devoting some time to.The maturation of ILS business models means that reinsurers are now deeply embedding investor capital within their underwriting and in some cases the fee income is at a level that it is now on the radar of their shareholders.

Just how much additional leverage, or firepower, alternative capital and ILS capacity are giving to the reinsurers that have embraced the capital markets most wholeheartedly is difficult to ascertain.But it is increasingly meaningful and could be, at least in part, one of the drivers of reduced costs of capital for the sector.Bring efficient capital together with technology and the benefits to reinsurers are accentuated.

We suspect that, in time, a focus on measuring the effect of third-party capital use on a reinsurers business may get more attention from the rating agency and analyst community.While alternative capital has long been said to be an influence on the reinsurance market cycle, this was largely being said in relation to pricing.When actually, we believe the real influence on the reinsurance market cycle that alternative capital and ILS exerts may be in raising the efficiency and reducing operational costs of a traditional business model, or stimulating the development of entirely new business models that put the capital market first..

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.