It’s Not Over: Tough Times to Persist for Reinsurance



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Offering a key takeaway from the report titled, ” Reinsurance Market Dynamics: January 2023,” Joe Monaghan, Aon Global Growth Leader, said, “The challenges that we faced at January 1st will persist as we move into the April, May June and July renewal,” speaking on a video accompanying the report. “But we did place the limit we negotiated contracts and we found a successful landing to move forward in many trading relationships,” he said of the January period, expressing the hope that the same would happen later in the year.

Using a phrase that representatives of Gallagher Re also used in their assessment, Monaghan said this was the toughest January 1 renewal “in a generation,” highlighting the challenges for “property lines of business, including property-cat business in all geographies, working layer programs and aggregate covers.” Pricing for U.S. property-cat and global property retrocessional business “hit multi-decade highs” at January 1, Aon said.

Distinguishing the drivers of high prices for this year’s Jan. 1 period from other in the industry’s history, Monaghan stressed that “it wasn’t just driven by losses. It was driven by a number of factors outside of the reinsurance industry—and those factors will persist for the foreseeable future,” he said.

Referring to the loss driver common to other tough renewal seasons, Aon said insurers’ desire to buy more limit at 1/1 collided with reinsurers’ need to reduce volatility and improve profitability after a string of poor results since 2017. Notably, over the six-year period ending in 2022, a group of 17 reinsurers analyzed by Aon (Aon’s Reinsurance Aggregate) posted an average combined ratio of 101 and an average return on equity of 5 percent.

“This is one of the driving forces behind current underwriting discipline,” the report said.

But it wasn’t the only one.

Adding to the challenges were high levels of inflation, limited availability of retrocession capacity shrinking reinsurer equity. The drop in retro capacity followed Hurricane Ian in late September 2022, Aon said.

Putting numbers to the erosion of reinsurer equity, which was driven largely by precipitous rise in interest rates, Aon estimates that global reinsurance capital fell by 17 percent to $560 billion over the nine months through September 30, 2022.

(Editor’s Note: While the percentage drop calculated by Aon is similar estimates from other brokers, the dollar amount in Aon’s capital tally is higher. Howden, for example, reported that dedicated reinsurance capital eroded by 15.7 percent to $355 billion at year-end 2022. In the past, Aon executives have explained these types of differences by noting that its total counts “every aspect that’s devoted to taking catastrophe risk for insurance companies,” including “all the capital in platforms where a carrier writes both insurance and reinsurance” and government funds that provide reinsurance-like capital.)

While “meaningful new capital” did not enter the reinsurance market at 1/1, Aon said “encouraging signs” emerged in December as “reinsurers were looking to take advantage of improved conditions.” Even though capacity coming into the reinsurance market didn’t make up for outflows earlier in 2022, new capital could enter during the first quarter, lured by more certain returns. “Capital entering the reinsurance market in 2023 will be rewarded by strong demand and attractive terms,” the report said, expressing the belief that insurance carriers will also reevaluate their retained volatility in the first quarter and may consider additional reinsurance purchases.

Still, the Aon report had some other advice for insurers looking to lower their retained volatility, including tapping into alternative capital and considering “integrated placements” of property and casualty.

Aon reported that capacity in the casualty reinsurance market remained plentiful during the renewal period. With reinsurers demonstrating an increased appetite for the class, a number of cedents explored options “to build cross-program support for casualty portfolios in order to build property catastrophe capacity, taking advantage of certain reinsurers’ desire to identify diversified growth opportunities.”

As for property retro, “new capital is being attracted to the retro market by higher rates and improved terms, but capital inflow has not kept pace with outflow and increased demand to cede more risk to third parties,” the report said.

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