Insurers could face gaps in risk transfer programmes and be forced to retain more risk, particularly at lower layers, if they do not come to the 2023 renewal season very well prepared.

That is what Aon’s head of EMEA, Eduardo Dávila, told Monte Carlo Today, summarising a set of market conditions that could make it a tricky renewal for some.

“The reinsurance market is tightening, with some traditional reinsurers limiting or removing cover, collateralised capacity becoming less available, and catastrophe bond capital favouring repeat issuers,” he said.

Reinsurers are adjusting rates for inflation, trying to narrow terms and conditions, and taking a more cautious view of risk with “secondary perils”. Climate projections will further drive loss modelling estimates, and increase demand for capacity.”

Dávila said Aon is busy helping clients to implement measures necessary to achieve a successful renewal. He said one of the most important aspects of this will be preparation. As inflation puts pressure on consumers and prompts interest rate increases by central banks, that in turn leads to claims inflation and demand surge—two of the most difficult scenarios for re/insurers to manage.

This requires more attention on reserve adequacy and dynamic forecasting of the future environment. “The key is to be well prepared and be able to clearly articulate the way the inflation or indexation is reflected in the presented portfolio,” he said.

“Aon is putting utmost care to assist all our clients to be well prepared with the inflation topic in their renewal submissions, in order to navigate any potential volatility.”

Another trend, he notes, is the need to identify new sources of capital. “By optimising our clients’ use of capital, we enable them to assume optimal risk, buy adequate protection, and become more resilient, while addressing regulatory requirements.

“As was seen at the mid-year renewals, capacity has become constrained in certain areas—Aon’s data show that total reinsurance capital decreased by 11 percent to $600 billion during the first half of the year—so it is vital that we are able to access and blend a range of capital sources on behalf of our clients.”

He admits that this renewal season will be challenging, but adds that Aon is finding new solutions for its clients to ensure their renewals are a success and that they are in a position to make better business decisions.

“For instance, we can help them with data and analytics, including our Impact Forecasting modelling solutions to develop their view of risk and to plan for inflation; assist them to understand the true cost of capital through our Capital Advisory unit to optimise long-term returns; and explore a range of alternative reinsurance and capital structures, especially in cases where expiring structures are under pressure.

“Differentiation, and anticipating reinsurer concerns, is increasingly key to insurers’ securing their support and obtaining the best available terms and conditions,” Dávila said.

He adds that Aon is increasingly providing more holistic advice as to how clients should use their own capital.

“In this challenging macroeconomic environment, our clients need strategies that are flexible and adaptive, to ensure they are optimising their returns while adhering to global regulation and reducing their downside risk.

“In recommending holistic capital strategies, we put our clients in the best position to dynamically respond to new opportunities, innovate, and meet the demands of their own customers,” he concluded.