INTERVIEW: TOMAS NOVOTNY, AON
Stability is the key desire of cedants and reinsurance buyers for 1/1 2024
The market search for stability signals a step-change from 2023’s difficult reinsurance renewal.
“Cedants and reinsurance buyers have made it very clear they are searching for stability. They do not want to see the volatility of the 2023 reinsurance renewal,” Tomas Novotny co-chief executive officer EMEA, Reinsurance Solutions, at Aon, told Baden-Baden Today.
“This year’s January renewal was the most difficult in living memory for many of the current insurance practitioners,” he adds.
Novotny says that reinsurers have been expressing relative satisfaction with the current portfolio mix, and satisfaction with the movement on reinsurance terms and conditions that occurred last year. The negotiating positions of cedants, buyers and reinsurers, in conjunction with new capital that has entered the system in the meantime, add up to an expectation that 1/1 2024 will be “a relatively orderly renewal”, he says.
The desire for more stability chimes with other market sentiments as the industry meets in Baden-Baden.
“Everybody expects Baden-Baden to be very different from last year. Last year, reinsurers were still slowly absorbing the aggregated losses of 2022 and were talking very little about the prospects of the 2023 renewals. This year, everybody expects a return to ‘normal’, giving much more focus to the traditional underwriting approaches, as well as more focus on reinsurers forming and blending the optimal portfolio they wish to build.”
However, 1/1 2024 will not be without its challenges. For Novotny, in the short term this relates to how the industry achieves stability. In the medium to long term, he says, the challenge will be sustainability.
“Referring again to the last January renewal, we cannot have a second year in a row where cedants are exposed to absorbing a lot more volatility than they have done in the past,” he says.
“There will again be much more focus on the analytics.”
Tomas Novotny, Aon
“A third challenge is achieving differentiation. After the slightly chaotic renewable season of 2023, when reinsurers needed to reset the reinsurance terms and conditions quickly, there will again be much more focus on the analytics, and on the way portfolios are presented to reinsurers.”
Novotny says that Aon will be helping its clients to navigate any volatility and shape better decisions at the forthcoming renewals, using data and analytics to provide a deep understanding of portfolio attributes. He adds that reinsurers will offer a “different treatment” to better-analysed cedant portfolios.
“There will be a difference in approach to the reinsurance brokers who are resending the same submissions as previous years, and the brokers who develop a well-formulated view of the cedants’ risk that they can defend,” he explains.
Rates and retentions
Commenting on the current state of the re/insurance market, Novotny highlights the increases in rates and retentions in the past 12 months, which have mostly affected purchasing in the bottom catastrophic layers.
“We need to realise that if we sent many natural catastrophes from the past years through the system today they would downstream very differently. The distribution of the losses between insurance and reinsurance would be very different,” he says.
“From this perspective, I would not expect any further major resurgence of the terms and conditions. For us in EMEA, it’s going to be a slightly mixed bag because we have places in EMEA where we did not see much natural catastrophe activity. In those areas I would not expect much change in the forthcoming renewal.
“On the other hand, in some places we have had serious losses, such as the February earthquake in Turkey. Clearly it will have an effect on the 2024 renewal.”
“We will see more cat bonds being structured in EMEA.”
In terms of how well the EMEA market dynamics align with global dynamics, Novotny says: “It’s important to remember that EMEA is basically a diversification space for the reinsurance players,” so the past decade of development of reinsurance terms and conditions and their renewals needs to be considered.
But, he adds, the major reset of reinsurance terms and conditions in EMEA during 2023 was no less than in the US and elsewhere in the world. “The reinsurance business which is being transacted in EMEA currently is showing great signs of robustness.”
When it comes to key trends, Novotny says the industry is deploying much more alternative reinsurance capital.
“We will see more catastrophe bonds being structured in EMEA, driven by cat bond investors. They want to diversify their exposure, which is mostly in the US, into the diversification peril and ideally into the diversification currency. EMEA is ticking both of these boxes.”
Traditional reinsurance is much more expensive than in the past, which in turn is helping faster development of insurance-linked securities, he says. “We will see more cat bonds being placed in EMEA than in the past.”
This goes back to cedants’ desire for sustainability, because they wish to have sustainable reinsurance protection in place.
“They do not want to be dependent on one potential source, which is traditional reinsurance, and that’s why they are opening up this second possibility,” he concludes.
Tomas Novotny is co-chief executive officer EMEA, Reinsurance Solutions, at Aon. He can be contacted at: tomas.novotny@aon.com
Main image: Shutterstock / Pernandi Imanuddin
