The global reinsurance sector is carrying more capital than ever while allocating a smaller proportion of that capital to catastrophe risk, according to new analysis from AM Best, a global credit rating agency and provider of insurance industry data and analysis.
The report shows that dedicated reinsurance capital reached USD $663 billion at the end of 2025, according to data from AM Best and reinsurance broker Guy Carpenter, while catastrophe risk budgets continued to fall.
The development reflects a widening gap between the capital available to reinsurers and the amount of capital required to support the risks they are assuming. AM Best said catastrophe probable maximum loss (PML) exposure remained broadly unchanged during 2025, despite further growth in the industry’s capital base.
As a result, catastrophe exposure now represents a smaller proportion of available capital. For reinsurers, this means greater capacity to absorb significant losses, support additional underwriting or retain larger capital buffers.
AM Best and Guy Carpenter estimate that total dedicated reinsurance capital increased from USD $607 billion at the end of 2024 to USD $663 billion at the end of 2025. The increase reflected 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.
Traditional reinsurance capital rose to USD $540 billion from USD $500 billion during the year, according to AM Best. Third-party capital, meanwhile, increased from USD 107 billion to USD $123 billion, based on estimates from Guy Carpenter and AM Best.
As we reported last week, AM Best and Guy Carpenter project that dedicated capital will reach $705 billion by the end of 2026.
The rise in capital has taken place without a corresponding increase in the industry’s capital requirements. AM Best said required capital remained broadly stable during 2025, continuing a trend seen over the previous few years.
This pushed traditional reinsurers’ capital utilisation down to 77% at year-end 2025, compared with 85% in 2024 and 92% in 2023. AM Best expects the figure to fall further to 72% in 2026.
Capital utilisation is used by AM Best 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.
The reduction in utilisation was mainly driven by the growth in available capital rather than a significant reduction in the risks carried by reinsurers. AM Best said required capital remained relatively flat, with only modest growth in asset risks, while underwriting and investment earnings continued to add to available capital.
This has left the sector with larger capital cushions. Reinsurers can use those buffers to absorb losses and market volatility, increase underwriting, invest in other insurance businesses, pursue acquisitions or return capital to shareholders.
However, the growing capital base also creates a question for the sector: where can additional capital be deployed without putting pressure on underwriting returns?
AM Best’s analysis indicates that catastrophe risk has not expanded in line with available capital. Catastrophe PML exposure remained broadly stable in 2025, meaning the amount of capital supporting catastrophe risk has increased more quickly than the underlying exposure.
The resulting decline in catastrophe risk budgets is part of a longer-term trend. The ratio of catastrophe PML exposure to available capital has fallen as capital accumulation has outpaced growth in catastrophe exposure.
There are differences between individual markets. AM Best said the European Big Four’s catastrophe PML risk budgets were at their lowest levels since 2016. By comparison, the US and Bermuda market has increased its catastrophe risk budget somewhat in recent years.
Since 2022, the catastrophe PML risk budget for the European Big Four has fallen by approximately nine percentage points, while the equivalent measure for the US and Bermuda market has risen by around 2.5 percentage points. AM Best said the figures indicate that catastrophe risk appetites are not uniform across the market.
The growth in traditional reinsurance capital has largely come from established companies rather than a significant increase in new market entrants. AM Best said reinsurers have been able to build capital organically through retained earnings following several years of strong underwriting and investment performance.
The market has 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.
Although profitability has moderated from the exceptionally strong levels seen after the January 2023 market reset, AM Best said returns have remained above the industry’s cost of capital.
Reinsurers have therefore been able to strengthen their balance sheets while also paying dividends, buying back shares and allocating capital to primary and specialty insurance operations.
The market has 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. AM Best noted that this was the lowest combined share for the group since 2018 and expects the proportion to fall to a projected 53.2% in 2026.
The decline partly reflects the continued expansion of Bermudian reinsurers and the wider distribution of capital across the market. Bermuda-based companies accounted for 16% of global reinsurance capital in 2025, compared with 15% a year earlier.
Third-party capital has also become a more significant source of capacity. According to Guy Carpenter and AM Best, ILS capital reached USD $123 billion at the end of 2025, up from USD $107 billion a year earlier.
Investor interest in catastrophe bonds and other insurance-linked securities has supported this growth. The sector has continued to attract capital because insurance risk can provide diversification from broader financial markets, while strong returns have encouraged existing investors to maintain or increase their allocations.
The combination of traditional and third-party capital has therefore increased the financial resources available to the reinsurance market without a comparable rise in the risks being supported.
For AM Best, the changing relationship between capital and catastrophe exposure is an important feature of the current market. A lower catastrophe PML-to-capital ratio gives reinsurers more room to absorb major losses or increase underwriting, although deploying additional capital could place pressure on returns if suitable opportunities are limited.
Reinsurers could respond by expanding their core reinsurance books, increasing exposure to primary or specialty insurance, making acquisitions or returning more capital to investors. Alternatively, they could retain larger buffers in anticipation of future market opportunities or periods of higher loss activity.
AM Best expects the global reinsurance capital base to continue growing in 2026. The company projects growth of around 6.3%, slightly below the rate recorded in the previous year.
The forecast assumes underwriting and investment performance broadly similar to 2025, alongside somewhat higher levels of share repurchases and dividends. AM Best also expects geopolitical and macroeconomic uncertainty to contribute to market volatility. The projection remains subject to change, particularly if catastrophe activity increases or geopolitical conditions deteriorate.
For the reinsurance industry, the central issue is therefore shifting. Capital availability is no longer the primary constraint, with both traditional and third-party capital at record levels. Instead, the challenge is how companies can deploy that capital while maintaining underwriting standards and achieving appropriate returns.
AM Best’s analysis suggests the sector begins 2026 with substantial financial resilience. Record capital, relatively stable required capital and catastrophe exposure, and declining catastrophe risk budgets have increased the industry’s capacity to absorb losses and respond to future demand. The extent to which reinsurers choose to deploy those buffers, retain them or return them to shareholders is likely to influence market competition and underwriting strategies in the years ahead.
The post Reinsurance capital hit record $663bn in 2025 as cat risk budgets fall: AM Best and Guy Carpenter appeared first on ReinsuranceNe.ws.
