Reinsurance companies provide insurance to primary insurers — when a catastrophe like a hurricane or earthquake generates losses too large for a primary company to absorb from its own balance sheet, reinsurers share that risk. This puts reinsurers at the top of the insurance risk pyramid, exposed to the largest and most severe loss events. The business is highly cyclical by design: after major loss years, reinsurance capacity reduces, prices rise sharply and terms tighten — this is the hard market that generates the best underwriting returns. After years of limited losses, capacity floods back, prices soften and margins compress. Munich Re, Swiss Re, Hannover Re and a handful of others dominate the market, with Bermuda-based specialists also playing significant roles. Climate change is extending the duration of hard market conditions by increasing the frequency and severity of natural catastrophe events. For investors, reinsurers are best owned entering hard market cycles following significant catastrophe losses, when pricing is rising and capacity is contracting, and sold as the market softens on low-loss experience and returning capital.
