Filtered for quality: Howden Re on capital, discipline and the mid-year market outlook

David Flandro, Head of Industry Analysis and Strategic Advisory, and Nena Atkinson, Associate Director, Strategic Advisory and Research, recently presented at BNP Paribas Asset Management’s third annual ILS Seminar in Zurich.

Their presentation, Filtered for quality: separating the wheat from the chaff in a riskier world, examined the forces shaping the reinsurance market at mid-year: abundant capital, easing rates, elevated risk premia, changing investor appetite and the increasing importance of disciplined capital deployment. The paradox of falling (re)insurance pricing in a volatile and risky global environment was addressed.

How would you characterise conditions at mid-year?

Flandro: The market is softening against a complex risk backdrop.

On the one hand, the sector remains well positioned. Dedicated reinsurance capital reached an estimated record US$505 billion at year-end 2025; reinsurer profitability has been strong in accounting terms and alternative capital has become an increasingly important part of the overall capital base.

On the other hand, this is not a benign risk environment. Geopolitical volatility, inflation, higher interest rates, casualty reserve pressure, cyber aggregation, secondary perils and private-credit stress are all headwinds.

That is the apparent paradox at the heart of the market today: risk premia remain elevated, yet insurance and reinsurance pricing are easing in most areas. As price declines and competition for growth intensify, the difference between disciplined underwriting and undisciplined growth becomes increasingly important.

If capital remains abundant, how should the market think about returns from here?

Flandro: Pricing is easing from a recent peak, which is a different proposition from a market in structural decline. The current moderation is partly a function of the speed with which capital has returned to the sector following a very profitable period for reinsurers. The 1 January 2023 hardening was significant in both price increases and decreases in assumed exposure; underwriting experience in the subsequent years was unusually strong. This has drawn both traditional and alternative capacity back into the market, culminating in a record year for gross ILS issuance in 2025. Concurrently, a diversified reinsurer holding a bond portfolio of around three years’ duration will have seen reference yields fall by roughly 100-150 basis points, depending on average rating, since their late-2023 peak. Falling yields lift the mark-to-market value of investments, buoying reported book capital across a sector whose portfolios broadly share this profile. Together, these forces have tipped a market recently defined by excess demand to one of excess supply, on average. 

But returns are now compressing. Although the sector’s equity spread remains elevated, this on its own it is an insufficient measure of economic profit. Our economic value-added analysis shows value creation is broadly neutral, on average, at current price levels. Further rate reductions would place greater weight on risk selection and portfolio construction. 

Where does alternative capital fit into that picture?

Atkinson: Catastrophe bond issuance reached another record in 2025, with new issuance around 45% higher than in 2024. Alternative capital is now clearly structural, with nearly 25% of total dedicated reinsurance capital coming from alternative sources. The fact that growth has continued even as pricing has begun to moderate shows how embedded the market has become in cedents’ programme structures.

For investors, ILS remain attractive because they are relatively uncorrelated to broader financial markets. But as pricing moderates, margins will come under pressure. This places greater emphasis on disciplined risk selection, portfolio construction and diversification to help sustain returns throughout the softer part of the cycle.

What does this mean for the next stage of the ILS market?

Atkinson: The ILS market is in a strong position; the next stage will depend on how carefully capacity is deployed.

Investors must continue to be selective. Much of the market remains concentrated around familiar catastrophe risks, particularly US property-catastrophe. Over time, greater expansion into international markets and less conventional perils will be important, both for the diversification benefits this offers and for the role ILS play in helping to close protection gaps.

The opportunity is to direct current appetite towards established peak risks where pricing remains adequate, and where there is a need, while broadening into areas where ILS add genuine value.