Reinsurance underwriting remains disciplined, with terms and conditions and attachment points largely intact, despite signs of rate moderation, according to an AM Best market segment report.
During the January 2023 renewals, the global reinsurance market saw a significant recalibration, which marked “a decisive shift in how risk is priced, shared, and retained,” said AM Best in its report titled “Reinsurers’ Disciplined Capital Deployment and Underwriting Remain Key Foundations,” published on Aug. 14.
“Across property catastrophe lines in particular, reinsurers implemented meaningful changes: higher attachment points, tighter terms and conditions, and across-the-board rate increases,” the report said, noting that this reset continued into the 2024 renewals and has established a more durable market structure characterized by reduced earnings volatility and stronger margins.
Indeed, the report added, the underwriting discipline employed by reinsurers over the past two-plus years has significantly improved their “ability to navigate this transitioning market.”
“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,” said Michael Lagomarsino, senior director, AM Best, in a statement accompanying the report.
The question many observers and market practitioners are now asking is whether the structural improvements seen in the reinsurance industry over the past several years represent a lasting shift – or will there be a return to soft market conditions when the industry isn’t able to cover its cost of capital.
“The lessons of past cycles suggest caution, but reinsurer sentiment has ensured tighter exposure management and market discipline in the current cycle,” the report said. “The absence of a flood of new company formations during this hard market may also reflect an emerging structural discipline that distinguishes the current cycle from past boom-bust episodes.”
Read more: What Happened to Reinsurance ‘Class of 2023’? Hard Market Defies Age-Old Patterns.
Rebalancing Portfolios
For example, many reinsurers have proactively rebalanced their portfolios “toward higher quality cedents and reduced or withdrawn from high-risk casualty lines such as U.S. commercial auto, general liability, excess casualty, and umbrella,” the report continued.
“Property capacity is increasingly tailored to treaties with stricter underlying terms, and reinsurers are maintaining discipline despite signs of rate moderation,” it said.
The proof can be found in reinsurers’ first half results when the majority of global reinsurers maintained strong performance, despite global natural disaster-related insured losses of at least US$100 billion, said the report, quoting Aon’s latest estimates.
AM Best pointed to the strong underwriting performance in 2024 of the “Big Four” European reinsurers, which reflects the positive impact of the structural changes made since the January 2023 — in the form of higher attachment points, tighter terms and conditions, and across-the-board rate increases.
Swiss Re, Munich Re, Hannover Re, and SCOR posted a discounted combined ratio of 86.4 under IFRS-17 accounting, AM Best confirmed. (Combined ratios below 100 indicate underwriting profits).
A similar picture occurred in the U.S. and Bermuda, where the composite reporting under U.S.-GAAP accounting delivered an undiscounted combined ratio of 89.5, the report said.
“These results confirm that underwriting profitability has not only rebounded but is being sustained in the current reinsurance cycle,” AM Best continued. “The improvements were driven by enhanced performance in property treaty portfolios, supported by disciplined capacity deployment and a focus on exiting working layers.”
Assuming there are no further large catastrophe events during the second half of 2025, the report said, “the combination of disciplined underwriting, rate adequacy, and robust investment income should deliver full-year operating results exceeding the cost of capital.”
Casualty Reinsurance
Casualty reinsurance, on the other hand, has added some complexity to the sector’s outlook by providing topline growth while introducing greater underwriting uncertainty, the report indicated.
“Concerns regarding adverse development in U.S. casualty books persist for global reinsurers,” AM Best said, noting that the segment remains cautious about casualty accumulation. .
“While the majority of reinsurers have reported favorable prior-year development over time as ongoing casualty reserve strengthening has been offset by strong favorable development on property and specialty lines of business, the industry remains challenged by unpredictable jury awards, broader interpretations of liability, and a lack of meaningful tort reform.”
The threat of adverse development has led reinsurers to respond “with price increases, stricter terms, and targeted capacity reductions,” but structural problems remain unresolved, said AM Best, explaining that capacity has not been withdrawn in many jurisdictions to the extent necessary to force political or legal reform, which assures that volatility will persist.
“Long-tail exposures continue to be a drag on earnings through adverse reserve development, even as reinsurers become more selective in allocating capacity,” AM Best said. “While many of the concerns around social inflation and loss reserves have focused on soft market accident years of 2015 through 2019, substantial adjustments made on more recent accident years in 2024 provide further cause for concern.”
AM Best confirmed that it maintains a positive outlook for the global reinsurance segment despite persistent headwinds such as social inflation, climate change and growing geopolitical tensions and trade disputes (which have increased uncertainty surrounding volatility in financial markets, claims costs, supply chain disruptions, and risk assessments and pricing).
“The structural and cyclical factors underpinning the market continue to justify the positive outlook, which speaks not just to performance but also to the resilience and adaptability of the global reinsurance segment in a time of transition.”
The report pointed to four structural factors that support its positive outlook for the sector:
- Risk-adjusted capitalization remains robust in terms of retained earnings and disciplined capital management.
- Underwriting profitability remains strong, augmented by a surge in investment income due to elevated interest rates.
- Market conditions continue to support favorable pricing, despite signs of localized softening.
- Reinsurers have made considerable advances in risk management, by strategically prioritizing artificial intelligence (AI) and data-driven underwriting, which has reinforced underwriting discipline and strategic selectivity.
Topics Profit Loss Reinsurance
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