A recent analysis by rating agency AM Best reveals that reinsurers are consistently exceeding their capital costs, primarily attributed to their developing alliances with alternative capital sources. For the past three consecutive years, global reinsurers have achieved returns significantly above their cost of capital, propelled by strong underwriting performance resulting from repricing and de-risking their portfolios.
The report indicates that the reinsurance industry's weighted average cost of capital saw an increase from 7.67% in 2024 to 8.23% in 2025, further rising to 8.63% in the first quarter of 2026. After a prolonged hard market, the abundance of capital and capacity in the global reinsurance sector is now fostering a softening trend, which accelerated considerably in 2026. Most major reinsurance companies reported exceptional returns in 2025, with a median return on equity (ROE) of 16.3%, only slightly below the record-breaking returns of 2023. Notably, AM Best points out that while natural catastrophe losses have been on an upward trajectory in recent years, 2025 experienced lower-than-anticipated losses. Reinsurers have adapted to the new reality of higher catastrophic losses, and the relatively mild year contributed to very high returns, which are unlikely to be repeated. Nevertheless, the terms and conditions established after the 2023 renewals have proven robust, and reinsurers are expected to maintain underwriting discipline and profitability in the near future.
The agency also underscores the crucial stabilizing role played by alternative capital in the contemporary reinsurance market. Effective risk management, strategic adoption of technology, and strengthened partnerships with alternative capital have mitigated the cyclical volatility of the reinsurance market by reducing extreme fluctuations. To meet or surpass the cost of capital, reinsurers must remain adaptable to market conditions, balancing short-term opportunistic strategies—such as capitalizing on favorable pricing and withdrawing when conditions are unfavorable—with long-term strategic objectives, including fostering relationships, developing expertise, and ensuring reliability and relevance over time. The reduced cost of alternative capital, accessible through insurance-linked securities (ILS) partnerships and structures like catastrophe bonds and sidecars, is a pivotal factor in sustaining reinsurer performance across various market cycles. The majority of reinsurance firms now employ an alternative or third-party capital partnership strategy, which has clearly matured. This involves ceding risk to capital market investors through ILS and cat bonds, establishing aligned risk-sharing structures like sidecars, or fronting and managing specific risk portfolios for investors, including through ILS funds. Furthermore, recent data from AM Best and Guy Carpenter projects that third-party capital in reinsurance, channeled through alternative capital vehicles, catastrophe bonds, and ILS, is expected to grow approximately 6% this year, reaching a record $130 billion by the end of 2026. Helen Andersen, an industry analyst at AM Best, commented that reinsurers' program structure adjustments, such as stricter terms and conditions and increased attachment points, have proven effective despite the softening market, enabling them to withstand the growing frequency and severity of secondary perils.
The evolving landscape of reinsurance, driven by strategic alternative capital partnerships, demonstrates a remarkable capacity for adaptation and resilience. This continuous innovation ensures that the industry remains robust and capable of navigating future challenges, reinforcing financial stability and fostering sustained growth.
