High rates are not shrinking reinsurance but shifting risk to trade credit

The expected channel is not working

The common reading runs like this: when risk-free yields rise, reinsurers shift capital into bonds and lose their appetite for risk. Catastrophe market data for 2026 do not support it. US Treasury data show the 1-year yield closing at 4.40% on 3 November, the 10-year at 4.95% and the 30-year at 5.32%. Rates are high, yet capacity is plentiful and getting cheaper.

The mechanism lies in how a cat bond is built. Investors' money sits in a collateral account invested in short-dated government paper, and the sponsor pays only the risk spread. Plenum data reported by Artemis put the collateral yield at 4.17% on 25 September, the risk spread at 4.57% and the total coupon at 8.74%. Although the spread narrowed by 9.5% in a month, the total coupon slipped by only 0.13 points. The risk spread is at its lowest since April 2018. At the 2016 trough the spread was 3.3% and the collateral yield roughly 0.5%.

In catastrophe cover, rates are a cushion rather than a brake

High rates give capital that insures catastrophe risk a cheap base return. Investors can keep their total-return targets while accepting a lower spread from sponsors. On 2 November Arch's chief executive described third-party capital as capacity with a lower cost of capital. The same company's gross reinsurance premiums fell 8% in the third quarter to $2.31 billion. The decline reflects price, not a shortage of capacity.

Rates are also carrying losses on the balance sheet. GIC Re, India's state reinsurer, booked a technical loss of ₹1,709 crore in the first half on a combined ratio of 107.39%, a loss 38.4% larger than a year earlier. Investment income of ₹7,504 crore more than covered it. Coface's investment income rose 47.5% over nine months. As long as interest income subsidises weaker technical profit, reinsurers are under no pressure to withdraw capacity in a softening market.

What rates do in catastrophe cover is hold prices up from below. Howden Re wrote on 2 November that the January 2027 pricing floor will stay above 2017 levels, citing rates, inflation and risk premiums. Argenta said on 3 November that combined ratios planned at Lloyd's for 2027 are the weakest since 2019. Prices are falling but not collapsing, and rates set the pace of the decline.

Trade credit is where the cost of rates lands

The real bite of high rates falls on indebted companies. On 3 November Coface's chief executive said high energy prices, AI investment and public deficits were pushing rates up. That pressure is straining fragile corporate and sovereign borrowers, keeping corporate insolvencies at a record and driving up credit insurance claims. Trade credit insurance protects a supplier selling on payment terms if the buyer fails.

For now Coface is absorbing this profitably. Its nine-month loss ratio improved by 1.9 points to 37.7%, with a combined ratio of 72.4%. Net profit, however, fell 11.8% to €155.5 million, and the company said it had markedly stepped up preventive measures. In credit insurance, prevention means cutting or withdrawing the limit granted on a risky buyer. Coface expects insolvencies to keep rising.

It is not alone in that view. In its 22 April report Allianz Trade forecast that global insolvencies would rise 6% in 2026, and by up to 10% if the conflict drags on. That forecast is six months old and an updated version could not be verified. Its direction nonetheless matches Coface's 3 November statement.

From credit limits to the price of goods

The chain works as follows. Once a credit insurer cuts a limit, the supplier can no longer sell on terms without cover. It either demands payment upfront or asks for a letter of credit. The buyer then finances its inventory with near-term borrowing, and in the United States even the 1-year risk-free yield is 4.40%. The cost of financing feeds into the invoice price.

On the freight side, pressure has yet to reach prices. Drewry's index fell 3% on the week to $4,429 per 40-foot container on 29 October. Carriers announced higher rates for November, but Drewry doubts they will stick given surplus capacity and weak demand. With freight cheap, financing becomes the channel that carries the cost of goods.

Türkiye sits in this chain as an exporter. Cover for a Turkish supplier selling to Europe on terms depends on the buyer's credit rating. As buyer limits tighten in Europe, the Turkish exporter must either demand payment upfront or carry the receivable on its own credit. This effect is our inference; the sources publish no limit data for Türkiye.

What would refute the thesis

The thesis is that high rates are not shrinking catastrophe reinsurance but shifting risk into trade credit, from where it reaches the cost of goods through financing. The first test is in catastrophe cover. If 1 January broker reports show property catastrophe price cuts below 5%, or a reduction in capacity, then rates are acting as a brake after all. The second test is in credit. If Coface reports in its February 2027 annual results that the loss ratio has fallen below 37.7% and that it has expanded limits, the first link in the chain breaks.

The third test is the rate itself. If the US 1-year yield falls below 3.75% by 31 January 2027, the financing channel weakens and cat bond spreads will have to widen again. The near-term calendar is set. Dates of 5 and 6 November are circulating for Swiss Re's nine-month results, neither of them verified. Munich Re will publish its final quarterly report on 12 November.