AM Best expects favourable earnings unless the sector suffers an unusually large catastrophe event.
Global reinsurers are facing growing pressure to cut prices as strong earnings since 2023 have pushed industry capital to record levels, raising concerns that increased competition could trigger another soft market cycle.
AM Best said the global reinsurance market is at an inflection point as reinsurers decide whether to maintain the underwriting discipline that has supported recent profitability or compete more aggressively for business.
The ratings agency said the global non-life reinsurance sector continues to benefit from strong capitalisation, favourable earnings and supportive market conditions.
Unlike previous hard markets, however, much of the new capital has accumulated within existing reinsurers rather than through the entry of new players.
This gives reinsurers more options for deploying capital and reduces their need to pursue growth solely through traditional reinsurance underwriting.
The pressure is particularly evident in property reinsurance. Renewal trends that shifted sharply in January intensified during the April and midyear renewals, with US property catastrophe placements, particularly in Florida, seeing price reductions widely estimated at 15% to 20%.
The key test for the market will be whether reinsurers can maintain pricing discipline despite having more capital available, AM Best said.
The agency expects the non-life reinsurance sector to maintain favourable earnings profiles unless it faces an unusually large catastrophe event.
But it warned that the industry’s ability to preserve underwriting discipline will be more important in determining whether current market conditions can continue.
“Casualty exposures often develop over many years, meaning that decisions being made today may not be fully understood until well into the next decade,” said Dan Hofmeister, director at AM Best.
He said maintaining pricing discipline in casualty reinsurance could ultimately be as important as discipline in property catastrophe business.
Casualty reinsurance is becoming a bigger strategic concern for reinsurers.
Some companies are pursuing growth in the segment because of stronger rates, whilst others are taking a more cautious approach because of uncertainty around social inflation, litigation funding, larger jury awards and worsening legal environments.
Alternative capital is also expanding into casualty risks, although casualty insurance-linked securities remain a small part of the overall market.
Investor interest in casualty-linked structures is growing, but the appeal of property catastrophe ILS has so far been difficult to replicate in casualty business.
Life reinsurance continues to provide relatively stable earnings for many large global reinsurers, helping to offset volatility in other parts of their portfolios.
Artificial intelligence is also expected to become a differentiating factor for reinsurers that can successfully integrate the technology.
AM Best noted, however, that AI models can be limited by incomplete or inconsistent data and could increase exposure to cyber and systemic risks.
“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,” said Michael Lagomarsino, senior director at AM Best.
“If not, history may once again demonstrate that the fundamental dynamics of supply, demand, and competition remain remarkably persistent,” he said.
