Reinsurance’s structural illiquidity is increasing the cost of capital and limiting flexibility across the risk transfer chain, with Howden Re outlining how a secondary market could change that dynamic.
The firm’s report, A secondary market for reinsurance, describes a market where most risk is held to maturity over one-year contracts, requiring upfront capital commitment with limited ability to rebalance exposures during the term.
The findings come at a time when the reinsurance sector is operating with elevated capital levels and strong financial performance. According to Aon’s January 2026 renewal report, global reinsurer capital reached $760 billion by September 30, 2025, supported by retained earnings and inflows from third-party investors.
The same report notes that reinsurers generated an average annualized return on equity of 16% in the first nine months of 2025, exceeding the estimated cost of equity of 8–10%.
This capital position has led to competitive conditions at renewal, including double-digit rate reductions in property catastrophe lines and improved terms for buyers in several regions.
Against this backdrop, Howden Re argues that illiquidity, rather than capital scarcity, remains a constraint on capital efficiency.
The report positions reinsurance alongside debt and equity as a form of contingent capital. By absorbing losses, it reduces earnings volatility and lowers the risk borne by investors, contributing to a firm’s weighted average cost of capital.
However, unlike other capital instruments, reinsurance is not actively traded. This lack of liquidity requires pricing to account for the inability to adjust positions once contracts are placed, increasing the effective cost of capital.
Introducing secondary trading alters this structure. The report applies a real options framework, stating that the ability to defer, expand, contract or exit positions has measurable economic value. In a hold-to-maturity market, that value remains limited; in a liquid market, it becomes material.
"In credit markets, secondary trading transformed static exposures into dynamic balance-sheet assets. We see the same opportunity in reinsurance. A functioning secondary market would let participants actively manage risk through the cycle, releasing capital when returns compress and adding exposure when pricing improves,” said Rob Bredahl, vice chair of Howden Re and chair of Howden Capital Markets & Advisory.
Recent renewal outcomes illustrate the contrast between available capital and limited flexibility. Aon reported that capacity supply exceeded demand at the January renewals, with stable demand and increased participation from third-party capital providers.
Third-party capital reached $124 billion by the third quarter of 2025, while catastrophe bond issuance exceeded $24 billion during the year, with $59 billion outstanding.
Despite this depth of capital, reinsurance transactions remain largely static once placed. Secondary trading activity is limited and typically occurs through bilateral arrangements, which do not provide continuous liquidity.
Previous attempts to introduce trading platforms have focused on primary placements or broader capital access and have not addressed post-placement risk transfer. These efforts also faced resistance where they attempted to replace existing broker relationships.
Howden Re states that a secondary market would allow participants to adjust exposures during the coverage period.
Reinsurers could rebalance portfolios after renewals to align with internal capital models. Cedents could trade risk from existing treaties rather than relying only on additional retrocession or direct and facultative placements.
Collateralized retrocessionaires could reduce exposure after seasonal events and release collateral. Traditional reinsurers could increase participations where marginal returns are considered attractive.
The report also notes that cedents may gain in-cycle price discovery and the option to repurchase risk under certain pricing conditions.
"When reinsurance is treated as a third form of capital, the case for liquidity becomes obvious. Secondary trading turns static, hold-to-maturity contracts into flexible instruments with real option value. This, in turn, lowers the cost of capital for cedents while allowing reinsurers to allocate balance sheet capacity far more efficiently,” said David Flandro, head of industry analysis and strategic advisory at Howden Re.
Howden Re states that the development of a secondary market depends on operational execution. This includes incorporating trading provisions into treaty structures and maintaining pre-approved counterparty frameworks to manage credit risk.
The report concludes that introducing liquidity within the existing broker-led system could allow carriers to adjust risk positions more actively and improve capital utilization over time, while remaining aligned with current market structures.
