NEWS
Insurers need fresh tactics to navigate 1/1 renewal
Insurers heading into the January 1, 2023 reinsurance renewals may be forced to abandon their preferred track, say experts at Aon.
Insurers heading into the January 1, 2023 reinsurance renewals may be forced to abandon their preferred track or structures and “think quite creatively” to overcome the many barriers and concerns which reinsurers may bring to the table, top officials at Aon have warned.
“This is not necessarily going to be a business-as-usual renewal,” the head of business intelligence at Aon Reinsurance Solutions, Mike Van Slooten, told participants in a briefing ahead of the Monte Carlo Rendez-Vous.
“You’re going to have to think quite creatively to secure the level of coverage you need,” he said. The industry may have stabilised earnings thanks to several years of market hardening, but there is no shortage of fresh concerns, chiefly inflation and climate change, he noted.
More than one story will play out in Monte Carlo. It’s a small principality, but Aon’s CEO of Reinsurance Solutions, Andrew Marcell, called it “a Tale of Two Cities: the property cat market, whose volatility has scared off capacity, and everything else”.
Price drivers include “pretty robust demand for reinsurance” as inflation stacks on top of heady loss experience. Capacity constraints, beyond the migration out of property cat, might additionally follow from the reduction in capital levels delivered by H1’s market turmoil. That should be just “accounting noise”, but “we are not entirely sure how that is going to play out”, Van Slooten said.
Carriers, no matter what the cover, should probably start by articulating a strong story on inflation and how their books are protected, Van Slooten said. It’s the “big topic,” and what Aon Re’s head of global property Tracy Hatlestad called “the number one discussion point we’ve had with reinsurers”.
“Consider all the forms of capacity that are on the market,” Van Slooten said of the requisite response from primary carriers.
But don’t think that the discussions will be limited to claims inflation. Inflation has not brushed the remaining frequency and severity concerns under any rugs, Aon insists.
“You’re going to have to think quite creatively to secure the level of coverage you need.”
Mike Van Slooten, Aon Reinsurance Solutions
“Inflation has dominated the headlines, but climate change remains a constant presence,” executive managing director Dan Dick told the panel. “Climate change is going to come back into focus very quickly.”
Dick encourages carriers to walk in not only with the most robust claims data, but a bespoke view to risk embedded in underwriting strategy.
Aon’s flurry of advice to carriers comes hand-in-hand with publication of its renewals guidebook, called the “Ultimate Guide to the Reinsurance Renewal”. Authors lay out a strong case for multifaceted differentiation when seeking property cat reinsurance given capacity constraints. Casualty, in turn, seems “poised for cautious growth”.
Aon may work for primaries during renewals, but the firm is not short on advice for reinsurers, chiefly encouragement to fill capacity gaps.
“For those reinsurers that can navigate and manage a global property cat portfolio, there is ample opportunity to make returns and to satisfy defined needs, which are growing,” Marcell argued. “In the end, reinsurers as a business need to maintain their relevance to our clients.”
The need for pragmatism
Aon’s report makes several other observations. It states that investors and reinsurers are reassessing their view of risk and appetite for natural catastrophe exposures, as macroeconomic conditions drive insurers to seek additional risk transfer capacity, resulting in a supply/demand mismatch that will continue through the January 2023 renewal.
“While the majority of reinsurers have opted to maintain existing capacity levels, some have reduced or withdrawn their participation in the property catastrophe market,” the report notes.
“Climate change remains a constant presence.”
Dan Dick, Aon
Aon’s data highlight that global reinsurer capital declined by 11 percent, or $75 billion, to $600 billion in the first half of 2022, principally driven by substantial unrealised losses on investment portfolios. Additionally, the strengthening of the dollar against the euro has particularly impacted European reinsurers’ capacity provision.
The report also highlights that catastrophe bond issuance could reach record volumes in 2022, as alternative capital levels remain robust—having decreased by just 1 percent to $95 billion during H1 2022. Attracting new sources of capital to the market, combined with data-led portfolio differentiation, will be essential to meeting insurers’ reinsurance requirements going forward.
Joe Monaghan, global growth leader at Aon’s Reinsurance Solutions, said: “Reinsurers will prioritise cedants that provide detailed exposure data and demonstrate underwriting actions that mitigate areas of uncertainty, especially around the impact of inflation on total insured values. Reinsurers must also be mindful that cedants are equally affected by the trends that have negatively impacted property catastrophe results.
“All parties will need to be pragmatic, flexible and open-minded to different solutions and trading relationships.”
Aon highlights that within the challenging reinsurance marketplace, there remain opportunities for diversification and growth: the casualty reinsurance market is proving robust, and along with specialty lines, should remain attractive to reinsurers seeking to diversify from natural catastrophe risk. Meanwhile, the fast-growing intellectual property (IP) market could represent an attractive proposition.
Monaghan added: “The reinsurance industry has absorbed volatility and proved resilient to many historical shocks and challenges. Despite the current headwinds, reinsurance remains a highly accretive source of capital for the insurance industry and one that is rightfully in high demand.”
Main image: Shutterstock / cunaplus
