NEWS
Aon sees just enough competition to give cedants a fighting chance at 1/1
The 2023 cat bond bonanza may herald competitive tension in certain corners of the market.
Primary insurers will have to approach the 1/1, 2024, renewal without the comfort of having seen the traditional rush of capital into a hard market—but capacity has entered and there are just enough signs of increased competition for cedants to have a fighting chance of improved terms and an orderly renewal, according to broker Aon.
“We expect and will be pushing for a reduction in rates in most places where we see competition and more than adequate pricing,” Andy Marcell, Aon’s chief executive officer of Risk Capital and Reinsurance Solutions, told an online audience of cedants and reinsurers ahead of the Monte Carlo Rendez-Vous.
The top end of reinsurance programmes are now seeing more competition—and Marcell can provide a chance for his reinsurance brokers to truly earn their keep. “The higher up the stack you go, the greater the competition,” Marcell said of conditions since the mid-year renewals. “We anticipate that continuing.”
Property-catastrophe business, which has seen some of the highest rate increases to date, is now experiencing some downward pressure on pricing, Tracy Hatlestad, Aon’s head of property reinsurance claimed, saying: “We expect that pressure to continue.” Supply can rise to meet an anticipated 5 to 10 percent increase in cedant demand, she said.
Despite this optimism in some areas, Marcell admits that the market has not seen the inflow of new capital or the influx of new entrants “that could grease sentiment” normally seen in a so-called hard market.
The upshot can only be enduring market discipline. “I don’t expect there will be a huge expansion of capacity,” Marcell said. “The overall discipline reinsurers have will continue.”
The capacity dynamic has been buoyed in other ways. Improved reinsurer earnings have helped recoup roughly half of the capital lost in 2022 losses, Mike van Slooten, Aon’s chief of business intelligence, estimates. A partial market rebound has helped, but a major a gap remains.
“The higher up the stack you go, the greater the competition.”
Andy Marcell, Aon
While some reinsurers, such as Everest Re, have raised new capital, further capital raises are unlikely for either traditional reinsurers or new starters, Kelly Superczynski, Aon’s head of capital advisory, said. Prior hard markets traditionally drew a quick wave of capital to recoup whatever losses had triggered the hardening. “We’re not seeing that today,” she said.
The issue is that current valuations aren’t at levels that investors get excited about, Superczynski noted. The boost to reinsurer return on equity may be “closer to what investors want,” she admits, “but they want this through the whole cycle, not just at the cycle peak.”
Record levels of cat bond issuance have been an outlier bullish signal for the markets, with major issuance in the first half likely to send the market to a record year of $15 billion, Aon believes. “The cat bond market, in particular, is likely to provide some competitive tension in certain markets,” van Slooten said.
Superczynski, meanwhile, described structured reinsurance as the unsung hero and fastest growing pool of new capital. She cited growth in the transfer of reserves to the legacy market as another mechanism which is serving to increase the amount of capital available. “Traditional reinsurance remains the most accretive and most available, but firms have various levers to pull.”
Structured solutions may be the best option for cedants needing to regain some of the lower layers lost in the rough and tumble of the 2023 renewal. Treaty deals for lower layers remain a tough order across the board.
“Many different types of insurance companies” arrive at the 1/1 renewals, some with challenges in geography, scale and diversification that demand reinsurance for capital management, Marcell said in a plea to reinsurers to do deals in the name of re-establishing strained relationships.
“They will be looking for ways to get more frequency coverage to the extent possible at affordable prices,” Marcell noted. “I expect that to be an ongoing discussion through 2024.”
Main image: Shutterstock / Master1305