European reinsurers’ capital surplus could add pressure to 1/1 renewals

European reinsurers are entering the 1/1 renewal season with capital levels well above their target ranges, a development that could intensify pricing pressure across the market.

According to J.P. Morgan’s latest Love Actuary report, the region’s largest reinsurers, which include Munich Re, Swiss Re, and Hannover Re, are materially over-capitalised, with Solvency II ratios sitting at the top end of their target bands and significantly higher than the wider European insurance sector.

J.P. Morgan noted, “The Atlantic Hurricane season is coming to an end with almost no events of note taking place despite what was expected to be an active season.

“Prices are likely to come under pressure in property catastrophe lines as a result. 2025 got off to a tough start with the LA wildfires occurring in January, which will likely cost more than $40 billion for insured losses, but the remainder of the year has been exceptionally benign with Q3 following on from a well below-average Q2.”

When compared with the broader insurance sector, European reinsurers reportedly maintain the strongest capital ratios.

As mentioned, the three largest reinsurers, along with Beazley, lead the sector with the highest Solvency II ratios.

“The reinsurers, on average, have ~45ppts higher solvency than the European composites at 1H25 vs 12ppts at FY21. Business models for the reinsurers tend to focus on diversification and traditionally taking on tail risk from the primary insurers. Following a major natural catastrophe event, reinsurers will want to remain adequately capitalised in order to take on more risk, on the basis that pricing is likely to be stronger,” J.P. Morgan explained.

Currently, Munich Re, Hannover Re, and Swiss Re all maintain capital ratios above the top end of their target ranges.

However, the report cautioned that surplus capital cannot be evaluated in isolation, as reinsurers’ ability to deploy it varies depending on factors such as typically more stringent rating agency requirements and leverage considerations.

“While we think it is too simplistic an argument to look at the level of capital surplus above target ranges and assume all capital can be returned, we do believe that the reinsurers have plenty of headroom to further increase payouts. Hannover Re recently increased its payout ratio to at least 55% of earnings, and we expect that Munich Re will again increase its share buyback to €2.5 billion at year’s end,” the report added.

Still, with capital buffers well above target, European reinsurers may face a dilemma in 2026, having to choose between deploying excess capital through higher payouts or using it to compete aggressively in the renewal market, which could put downward pressure on pricing across property catastrophe and other major lines.