…As Catastrophe Risk Budgets Decline
The global reinsurance sector is grossing more capital than ever while allocating a smaller proportion of that capital to catastrophe risks in financial year 2025.
A new report on the global risk-underwriting industry from AM Best, a global credit rating agency and provider of insurance industry data and analysis and reinsurance broker Guy Carpenter, indicated that dedicated reinsurance capital surged to USD $663 billion at the end of 2025.
An online news medium, Reinsurance News, reported on Wednesday that the improved capital reflected a widening gap between the capital available to reinsurers and the amount of capital required to support the risks they are assuming.
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The authors of the study noted that catastrophe probable maximum loss (PML) exposure remained broadly unchanged during the year under review, despite further growth in the industry’s capital base.
Consequently, catastrophe exposure now represented a smaller proportion of available capital. For reinsurers, this means greater capacity to absorb significant losses, support additional underwriting or retain larger capital buffers.
The report further reflected estimated that total dedicated reinsurance capital increased from USD $607 billion at the end of 2024 to USD $663 billion at the end of 2025, with the increase indicating growth in both traditional reinsurance capital and third-party capital, with strong underwriting results, investment earnings and investor demand for insurance-linked securities contributing to the expansion.
A further analysis of the report’s findings showed that traditional reinsurance capital rose to USD $540 billion from USD $500 billion during the year, while Third-party capital increased from USD 107 billion to USD $123 billion, based on estimates from Guy Carpenter and AM Best.
AM Best and Guy Carpenter projected that dedicated capital would reach $705 billion by the end of 2026, a target that has been met without a corresponding increase in the industry’s capital requirements.
The global credit rating agency noted that required capital remained broadly stable during 2025, sustaining the trend over the previous few years, thereby dipping traditional reinsurers’ capital utilisation to 77% at year-end 2025, compared with 85% in 2024 and 92% in 2023, even as it expects the figure to fall further to 72% in 2026.
It clarified that capital utilisation was used to assess the relationship between available capital and the capital required to maintain risk-adjusted capitalisation at the Strongest BCAR level of 25% at a 99.6% value-at-risk level.
AM Best linked the reduction in utilisation mainly to the growth in available capital rather than a significant reduction in the risks carried by reinsurers, adding that required capital remained relatively flat, with only modest growth in asset risks, while underwriting and investment earnings continued to add to available capital.
AM Best’s analysis indicated that catastrophe risk had not expanded in line with available capital while Catastrophe PML exposure remained broadly stable in 2025, meaning the amount of capital supporting catastrophe risk has increased more quickly than the underlying exposure.
It reported that the resulting decline in catastrophe risk budgets was part of a longer-term trend, noting that the ratio of catastrophe PML exposure to available capital has fallen as capital accumulation has outpaced growth in catastrophe exposure.
The credit rating agency and insurance data provider noted that there were differences between individual markets with the European Big Four’s catastrophe PML risk budgets at their lowest levels since 2016 while the US and Bermuda market had increased its catastrophe risk budget somewhat in recent years.
AM Best reported that since 2022, the catastrophe PML risk budget for the European Big Four had fallen by approximately nine percentage points, while the equivalent measure for the US and Bermuda market has risen by around 2.5 percentage points, noting that the figures indicate that catastrophe risk appetites are not uniform across the market.
It reported that the growth in traditional reinsurance capital had largely come from established companies rather than a significant increase in new market entrants, saying that reinsurers have been able to build capital organically through retained earnings following several years of strong underwriting and investment performance.
This is even as AM Best revealed that market had benefited from disciplined underwriting, favourable margins and investment income, particularly from fixed-income portfolios that continue to earn higher yields than were available before interest rates began rising sharply in 2022.
Noting that although profitability has moderated from the exceptionally strong levels seen after the January 2023 market reset, AM Best reported that returns had remained above the industry’s cost of capital.
Based on this development, the rating agency disclosed that reinsurers had, therefore, been able to strengthen their balance sheets while also paying dividends, buying back shares and allocating capital to primary and specialty insurance operations.
It further reported that the market had also become less concentrated. The five largest companies by capital accounted for 54.2% of the traditional reinsurance capital composite in 2025, down from 55.8% in 2024, noting that this is the lowest combined share for the group since 2018 and expects the proportion to fall to a projected 53.2% in 2026.
