As market conditions soften and rate reductions accelerate, AM Best has revised its global reinsurance sector outlook to stable from positive, also cautioning that ILS capital could exert even more pressure on the market, although still viewing the situation as largely disciplined on the underwriting front.Before anyone gets too concerned about this downgraded outlook from AM Best, it’s worth noting that a positive outlook on the global reinsurance market from the rating agency was actually a very unusual situation.AM Best had upgraded its outlook on the global reinsurance sector from stable to positive and we learned at the time that this was the very first time the rating agency gave the reinsurance market such a glowing review.So turning the outlook back to stable is not a cause for particular concern, given in the long-history of AM Best assessing the market it has only had a positive outlook on global reinsurance for approximately 18 months.

With that context in mind, AM Best has a number of still-positive things to say, especially on terms and conditions.While it notes a key driver in its revised outlook is the accelerated softening of property reinsurance rates, AM Best believes terms are largely holding.There has been some loosening of terms and conditions, the rating agency says, but it believes that, “higher retentions imposed upon ceding companies in recent years have largely held,” which it further explains that AM Best sees as, “a favorable indication of sustained underwriting discipline, despite the declining rates for property exposures.” “The revision of the outlook to stable primarily reflects increasing pressure to reduce property reinsurance pricing, which may challenge the global reinsurance segment’s ability to sustain the very strong operating performance achieved over the past three years,” the rating agency further explains.

The rating agency also explains that it believes, “Property exposures are still being priced at levels that suggest technical adequacy on average.” AM Best acknowledges that strong performance among reinsurance capital providers, as well as rising capital levels in the industry, are key drivers of the rate reductions now being seen.While insured catastrophe losses surpassed $100 billion again in 2025, becoming the sixth consecutive year to do so, aside from the California wildfires there was an absence of larger quantum losses, which meant reinsurance did not attach as frequently.At the same time, reinsurers and reinsurance capital providers, including ILS funds, have benefited from higher attachments remaining in-force, which AM Best notes has benefited performance.

All of this has driven an accumulation of reinsurance capital, while at the same time rising investor interest in catastrophe bonds and other insurance-linked securities is driving available capacity higher still.“As a result, the reinsurance segment’s operating performance for 2025 is expected to generate returns that exceed its cost of capital for a third consecutive year,” explained Greg Dickerson, director, AM Best.Reinsurance capital has started 2026 at record levels, .

The robust capital levels has “reinsurers searching for opportunities to deploy capacity” AM Best said, which is also in part why inorganic growth ambitions are returning to the market at this time.January renewals saw some of the steepest rate declines in a number of years, especially in property catastrophe reinsurance.“These declines brought pricing closer to pre-2023 renewal levels, when severe market dislocation led to dramatically improved risk-adjusted pricing and stricter terms and conditions,” Dan Hofmeister, associate director, AM Best explained.

“At the time, that included an industry-wide retrenchment away from lower layers of property catastrophe reinsurance programs.” Once again, the rating agency cites that a lack of new entrants to reinsurance is also seen as a counterbalance to the less favourable softening trends that have emerged.However, the ILS market has the potential to exert additional pressure on the market, the rating agency believes.Saying, “The very strong performance of the insurance linked securities (ILS) space could attract more third-party capital, which could further pressure pricing in property catastrophe reinsurance, particularly in more remote layers.” As we’ve said many times, there remains something to be said for re/insurers evaluating how leveraging third-party capital compares with using their own on an efficiency level.

So whether their own capital could be diverted to more profitable uses in other layers of the tower or lines of business, while doubling down on use of ILS capacity and relinquishing certain return-periods of risk to the capital markets.ILS capital is largely attracted to specific areas of the reinsurance tower, especially in the catastrophe bond market.While a direct dollar for dollar comparison will almost always find a levered balance-sheet more efficient than fully-collateralized ILS, when comparing the possibilities to derive new profits through capital diversion elsewhere, some players may find leaning ever more heavily on ILS capital could actually be the better strategy..

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