Reinsurance companies, which insure insurers, saw a significant boost in profits this year by limiting their risk exposure to events like flooding and raising policy prices.

Reinsurers Profit as They Scale Back Coverage

A key profitability measure for reinsurance firms rose to 18 percent this year, signaling a trend expected to continue through 2027.

  • The annual return on equity for reinsurers increased by 2 percentage points to 18 percent, according to Guy Carpenter.
  • Reinsurers are reducing coverage for high-risk events, such as flooding, and increasing premiums.
  • Despite natural catastrophes like the California wildfires, the reinsurance industry is projected to remain profitable through at least 2027.
  • Hedge funds and private capital groups are entering the reinsurance market, impacting pricing dynamics.

The annual return on equity, a crucial indicator of profitability for reinsurers, climbed 2 percentage points to 18 percent this year, as reported by reinsurance broker Guy Carpenter. This growth is anticipated to continue, with an expected increase for 2025, though slightly less pronounced than the 22 percent gain observed in 2023. Reinsurers essentially provide insurance for insurance companies, helping them manage risk.

This surge in profits extends a positive trend that began in 2023. Many reinsurers strategically reduced the scope of their coverage for costly events, particularly flooding, and simultaneously demanded higher premiums. These increased costs are ultimately passed on to a wide range of customers, including governments, businesses, and homeowners.

Insurance companies and governments utilize reinsurance to mitigate their exposure to risks such as hurricanes, cyberattacks, and even acts of war. These policies allow entities with exposure to specific regions—like those vulnerable to Florida’s intensifying hurricanes—to better manage their financial vulnerabilities.

Guy Carpenter, a unit of insurance broker Marsh, forecasts continued strong profits for the reinsurance industry through at least 2027. This optimistic outlook persists despite the significant financial impact of natural disasters, such as January’s wildfires in California, which resulted in approximately $40 billion in insured losses.

What impact are hedge funds having on reinsurance pricing? Profitability is expected to remain robust even as increased investment from hedge funds like Elliott Management and private capital groups including Blackstone puts downward pressure on reinsurance prices, potentially affecting traditional providers.

Private investors are also increasing their presence in reinsurance through catastrophe bonds—instruments that transfer disaster risk to bondholders. Sales of these bonds reached a record high this year as insurers sought to offload the growing risks associated with climate change.

Years with over $100 billion in insured losses have become increasingly common in recent years. This shift is driven by factors like inflation, expanding urban areas, and the escalating effects of climate change, all of which contribute to the rising cost and severity of natural disasters.

The price of property reinsurance deals for 2026 renewals decreased by approximately 12 percent, according to Guy Carpenter. However, the price increases implemented in 2023 provided a sufficient buffer for investors to anticipate “strong profitability” over the coming years, stated David Duffy, president of global clients at Guy Carpenter.

Insurers and reinsurers are actively exploring new markets for their products, with a particular focus on artificial intelligence. They aim to provide more coverage for data centers and the energy infrastructure required to power computing operations.

Aon, the world’s largest reinsurance broker, estimates that the construction of data centers could generate over $100 billion in insurance premiums by the end of the decade.