AM Best: Reinsurers' discipline faces a 2027 test

AM Best counts the top 50 global reinsurers as still earning above their cost of capital. The edge is in terms, not rates. In the same report, published this week, the rating agency warns that 2027 will test whether those terms survive another round of competition, with the capital base still growing.

The new report sharpens an earlier warning from AM Best, which Insurance Capital Daily covered, that record capital inside the industry invites the next soft market. Now the agency puts a date on it: underwriting results should keep normalising through the rest of 2026 without a major catastrophe loss, and competition will be harder in 2027.

AM Best's confidence rests on changes in the hard market that have stuck: cedents keep more risk, risk selection is better, and reinsurers take less of the lower layers of towers. Those changes, the agency says, 'have largely remained intact' even as the market softened through 2025 and into 2026.

Since the hard market peaked, AM Best says, global reinsurance has changed a great deal. Years of returns below the cost of capital gave way to healthy profits once rates and discipline came back. The California wildfires in early 2025 tested the setup; AM Best credits them with sustaining profits rather than breaking them.

At the midyear 2026 renewals, the pattern held. Rates fell, cedents gained leverage, and reinsurers proved more willing to expand limits, broaden coverage, and flex terms and conditions, according to AM Best. Insurance Capital Daily reported earlier this month that midyear property-catastrophe prices dropped 16%, the steepest decline in decades; returns still cleared the cost of capital.

AM Best describes the added pressure in one sentence: 'Compounding this shift in market leverage is increasing competition from the ILS market.' Traditional reinsurers no longer push rates down and open terms by themselves; cat-bond and collateralized-re capital now sits at the same table.

That leverage gives cedents a choice. A cedent putting together a tower can compare a traditional reinsurer with cat-bond funds and collateralized-re vehicles in the same layer. AM Best's description of the renewals suggests buyers came out ahead.

Listings data show the scale. Bermuda Stock Exchange's listed ILS hit a record $70.5 billion at midyear, with $16.5 billion issued in the first half, Insurance Capital Daily reported. ILS managers have also moved into aggregate storm covers and Asian wealth distribution, according to ICD's recent coverage, carrying competition beyond the property-cat core. AM Best does not single out ILS underwriting beyond that sentence; it names the force without measuring it. For ILS investors, the implication is that the softening has an ILS component, and it will be tested alongside the traditional market in 2027.

The numbers are against discipline. With no significant industry losses in the first half, reinsurers built capital through profitable underwriting and catastrophe activity below long-term averages, all while interest rates stayed relatively high. More capital chasing the same risk tends to bend terms. AM Best expects sharper competition in 2027 on that basis.

There is a caveat for the present. AM Best notes rising severe weather losses in the United States in recent weeks and wildfire activity in Washington. A major second-half event would reset the negotiation the other way; otherwise the baseline through 2026 remains continued normalisation.

The result: returns beat the cost of capital for a third consecutive year, according to AM Best's earlier assessments, but the buffer comes from the structure of the business, not from pricing. The discipline that survived 2025 and 2026 is the same discipline competition is now asking to relax. The watch item is the next attachment point.