Aon calls on reinsurers to ‘lean in’ to complex and interconnected risks

Aon is calling on the reinsurance industry to deploy its record levels of capacity to help insurers address complex and interconnected risks.

In its pre-Monte Carlo Rendezvous reinsurance report, the broker contrasted the reinsurance industry’s historic results with insurer catastrophe losses and increasing complexity of risk. At a time of high catastrophe losses, and large man-made events like the collapse of the Baltimore Bridge and the CrowdStrike outage, reinsurers are making record returns.

“We see combined ratios averaging at around 90%, suggesting significant margin in the business as it is structured today. We see healthy investment returns with more improvement to come based on recently disclosed reinvestment rates. And we see average return on investment at close to 20%, which is well ahead of stated targets and the primary market. In fact, these are some of the best results the reinsurance sector has ever produced,” according to Mike Van Slooten, head of Business Intelligence for Aon’s Reinsurance Solutions business.

With strong earnings, reinsurer capital has reached a new high of $625bn, which included a record $110bn of alternative capital, according to Aon data. “The question then becomes, what will be done with all the new capital being generated? We have a clear answer. Work with us to help our clients overcome the increasing complexity of risk that we see in today’s marketplace,” said Van Slooten.

“Indeed, there are multiple challenges. Insured losses from secondary perils are continuing at record levels, and the bulk of these losses are being retained by the primary market. Based on the latest data, it looks like 2024 will be another $100bn [nat cat] loss year, irrespective of what happens in the remainder of the Atlantic hurricane season. On the casualty side, litigation funding, adverse legal environments and emerging risks are creating significant uncertainty around loss costs,” he said, speaking at an online launch of the report.

“As well as the trauma of local conflicts, heightened geopolitical risk is bringing supply chain, resource dependency and cyber aggregations into focus. In short, withdrawal from risk is not the answer. Helping to manage risk is the business we are all in. We therefore call on the reinsurance community to lean into these challenges and work with us to build more a sustainable and relevant insurance marketplace,” he said.

Aon noted that the industry has experienced significant volatility so far in 2024, with diverse events including earthquake and airline losses in Japan; the Baltimore bridge collapse in the US, historic flooding in Dubai, and the CrowdStrike global computer outage. Catastrophe losses were almost $60bn in the first half, yet most of these losses were retained by the insurance market, the broker said.

“Such losses reinforce recurrent, yet critical, themes for the industry – the growing interconnectivity and complexity of risk, volatility of losses, and the widening gap between insured and economic losses. The industry can either lean into the opportunities created by a world of changing risk or retrench and watch as a greater proportion of risk is retained or shifts to the public sector and capital markets,” said Rupert Moore, UK CEO of Reinsurance Solutions for Aon.

“If the reinsurance market is to provide real value, it must play a more active role in helping insurers to manage frequency losses and earnings volatility. If reinsurers continue to run from risk, it will force insurers to follow suit and we will all become part of a shrinking, and less relevant industry. Aon is here to bring clarity and confidence around risk, shaping better decisions and highlighting profitable growth opportunities for all parties,” he said.

With ample capacity in the market, reinsurers are looking to grow, according to Andy Marcell, Aon’s CEO of Risk Capital and CEO of Reinsurance Solutions.

“In the main, [reinsurers] are looking to grow. Returns in the reinsurance space have been very attractive and at record levels, so people are looking to expand their positions with key clients and marketplaces. Given that we saw competition in the tail end of cat programmes and the need for [insurers] to obtain sideways protection and take more volatility, we expect it to be a competitive renewal season, particularly in the tail end of cat programmes, which is further fuelled by the robust nature of the cat bond market,” he said.

At the same time, demand for reinsurance is strong, while insurers are looking to buy more protection against frequency of catastrophe losses. Reinsurance limit purchased increased by 10% in 2024 and is likely to grow again by around 5%, Aon predicted.

The report highlighted the untapped growth potential of the industry, noting that the ratio of global insurance premium to gross domestic product has remained at approximately 1.8% since 2010, despite exposure growth and unmet client need.