Fitch predicts strong expansion in alternative reinsurance capital for 2025

With insurance-linked securities (ILS) capital levels reaching record highs in 2024 and market returns remaining appealing—particularly due to strong catastrophe bond issuance—Fitch Ratings expects continued substantial growth in alternative reinsurance capital supply throughout 2025.

In a new report on the Bermuda reinsurance market, Fitch highlights that catastrophe bonds have outperformed other ILS instruments during periods of high catastrophe losses. The agency also notes that investor confidence in ILS remained strong throughout 2024.

According to Fitch, the expansion of alternative reinsurance capacity was driven by favorable pricing conditions for property catastrophe risks in 2024, following a major price correction in the previous year, which created attractive expected returns.

“The ILS market reached a record USD 113 billion at 9M24, driven by a USD 17 billion surge in catastrophe bonds. This brought total outstanding catastrophe bonds to USD 47 billion at year-end 2024, surpassing the previous year’s record by 11%, as reported by Aon Corporation. Several Bermuda-based sponsors, including Arch Capital Group Ltd., Ariel Re Ltd., Aspen, Everest Group, Ltd., Fidelis Insurance Holdings Limited, and RenaissanceRe Holdings Ltd., issued catastrophe bonds in 2024,” Fitch stated.

The agency expects alternative reinsurance capital supply to keep expanding in 2025.

Barring major losses, Fitch anticipates the ILS market will remain resilient in the near term. However, while emerging risks such as cyber insurance may experience growth, they are unlikely to see substantial participation until risk modeling capabilities improve.

Catastrophe bond returns were particularly strong in 2024, as investors benefited from attractive yields on recent transactions and the higher positioning of cat bonds in cedent catastrophe reinsurance structures.

Meanwhile, ILS capacity supporting aggregate reinsurance has faced pressure due to severe storm activity in the U.S. and recent wildfires in California.

Fitch analysts recently stated that any catastrophe bond losses from the Los Angeles wildfires are expected to be minimal and should not hinder future market issuance.

The report also highlights rising global reinsurance demand, driven by insurers covering growing insured values due to inflation and exposure increases, alongside heightened risks from catastrophes, climate change, and economic and geopolitical uncertainty.

Higher returns have encouraged reinsurers to deploy more capital, which has put downward pressure on pricing during January 1 renewals.

“Fitch expects these softer market conditions to persist at the midyear 2025 renewals, including those in April (Asia-focused) and June/July (Florida),” the agency concluded.