As per a new report from Morningstar DBRS, climate change is expected to be a meaningful primary long-term driver of reinsurance volumes. However, while the reinsurance market is currently at overcapacity, this is setting the stage for softer conditions in the medium term, the analysis states.
“As temperatures continue to rise worldwide because of climate change and global emissions, the reinsurance industry is facing increasing losses. The frequency of these large-loss events may have stabilized, but from what we can see, the severity of these events continues to rise. This should increase the demand for insurance and reinsurance coverage, driven by rising awareness, thereby closing the protection gap,” analysts from Morningstar DBRS explain.
“This is, or should be, a volume story that supports the top-line growth of reinsurers over time. However, the larger reality is that the market is operating at overcapacity, and that is the more important driver in the medium term.”
Global warming, which is primarily fuelled by rising greenhouse gas emissions from fossil fuels, has led to a consistent increase in the Earth’s average surface temperature.
This has been linked to a rise in droughts, rising sea levels, and, crucially, more severe storms with heavier rain and stronger winds.
Analysts point out that while the resulting increase in economic losses from catastrophes should, in theory, fuel long-term growth for property & casualty reinsurance, capital has not yet been outstripped by these losses, leading to the current market shift.
According to analysts, the reinsurance market is showing signs of turning.
“The largest 10 reinsurance companies hold a combined market share of 69.4%, translating to a 586.3 Herfindahl-Hirschman Index, which reflects an unconcentrated industry that we believe is indicative of low barriers to entry. Following the financial crisis, the reinsurance cycle stayed hard, as industry capital remained constrained until around 2013,” analysts explain.
Adding: “At this point, we think the attractive returns on offer had enticed enough capital that a negative impact on pricing began to take effect as capacity began to swell. And as global catastrophe losses began to decline, market softening was free to run.”
Morningstar DBRS also outlined that in its opinion, hurricanes Harvey, Irma, and Maria in 2017, marked the bottom of the soft cycle, and due to the long settlement cycle of catastrophe bonds, the market did not fully harden for another two years.
Moreover, the significant loss year of 2021, which included Hurricane Ida as well as other major events, then accelerated the strengthening of the market. But, with alternative capital now at record levels, pressure on pricing has resumed.
As we’ve reported extensively throughout 2025 and highlighted in our Q2 2025 cat bond and related ILS market report, alternative capital growth has been driven by the catastrophe bond market, with year-to-date 2025 issuance already surpassing the previous record set in 2024.
Furthermore, Morningstar DBRS anticipates that the softening of the market is the most pressing issue for the medium term.
“There have been discussions in the market suggesting that reinsurance cycles are becoming longer, which implies an extended period of higher reinsurance rates. However, we believe we have recently experienced a prolonged, yet gradually hardening, market in the early years. That firming then accelerated,” analysts explained.
Adding: “While the market softened for four years between 2014 and 2017, it began to harden between 2018 and 2020, gently. It wasn’t until the heavy natural catastrophe year of 2021 that the real strengthening of the market started to take effect. The firm market we are now leaving has been in effect for seven years. Alternative capital has reached record levels, and losses from the Los Angeles wildfires have not offset the fall.”
It’s also important to highlight that many of the major reinsurers are incorporating increasing amounts of third-party capital into their business models, in order to help them write more catastrophe risk.
This likely suggests more opportunities for investors as rising catastrophe events and climate change are driving the need for more reinsurance capital and protection.
