Reinsurance market moving towards ‘true hard’ territory as buyers struggle at mid-year renewals: Aon

Reinsurance buyers faced a near-perfect storm during June and July property renewals as capacity constraints collided with rising demand for protection, but the majority of insurers were able to ultimately secure the cover they needed, according to Aon. However, the broker warned that reinsurance buyers may soon face a truly hard market that will struggle to meet all of their needs. Aon said that for the first time since the devastating US hurricanes of 2004 and 2005 – which included Charley, Ivan, Katrina, Rita and Wilma – property nat cat capacity contracted during the renewals period, particularly for lower layers of reinsurance limit for Florida catastrophe risk. According to data released by Aon in its mid-year renewal report, reinsurer capital decreased to $645bn by the end of March from $675bn and the end of 2021. Alternative capital rose to $97bn. But as capacity fell, inflation and volatility in investment markets, combined with elevated natural catastrophe losses, drove insurer demand for higher reinsurance property limits. Aon noted, however, that “despite challenges”, the majority of property insurers were “ultimately able to satisfy their reinsurance needs” during the renewals. But Joe Monaghan, global growth leader for Aon’s Reinsurance Solutions, warned that buyers may find things even tougher at future renewals as the market looks set to struggle to meet demand. “The property reinsurance market may be fast approaching a true ‘hard’ market, where overall demand is not readily satisfied,” he said. “Inflation, economic and financial markets uncertainty, and climate change will increase volatility and put insurer capital under growing pressure, just as reinsurers retrench,” continued Monaghan. Aon added that the casualty reinsurance market remained stable through 1 June and 1 July, although concern over social inflation and emerging risks made for “more challenging” renewals. Monaghan said attracting new sources of capital to the reinsurance market, combined with data-led portfolio differentiation, will be essential to meeting insurers’ risk transfer needs going forward. Just like risk managers buying from insurers in the hard market, reinsurance buyers are now having to prove their risk management credentials to obtain the cover they want at the best price. “Differentiation and anticipating reinsurer concerns are increasingly key to insurers’ securing their support, obtaining the best available terms and conditions, and maintaining business resilience,” said Monaghan. According to reinsurance broker Gallagher Re, reinsurance cost continued to rise at the June and July renewals as the market pulled back from catastrophe exposures amid rising inflation and capital market volatility. According to Gallagher Re’s 1st View report, reinsurers pulled back from writing lower-level catastrophe exposures, which drove price increases across all territories, and Australia and Florida in particular. “At the time of writing, there are limited signs of new capital entering the reinsurance market to offset the current firming trend. There are concerns that in some specific lines of business where buyers are seeking additional capacity, a restricted supply is leading to stresses not seen for several years… Reinsurers now appear to be more sensitive to losses and wider external events than at any time since 2008,” Gallagher Re says in its report. According to James Vickers, chairman of Gallagher Re International, price increases were more marked at the June and July renewal. “If you look across all the renewals [in June and July], particularly on the property cat side, pretty much everyone now is paying some sort of increase, and some more than others. At 1 January, there were a few [insurers] that squeaked through with flat renewals, or rate reductions. At 1 July, nobody did,” he told Commercial Risk. A “cocktail” of economic factors – inflation, rising interest rates and the threat of stagflation – influenced the June and July renewals, according to Vickers. Inflation and rising interest rates, which have been largely predictable for the past decade, affected reinsurers’ appetite for volatility, which translated to a shift away from catastrophe lines, he said. “For years, reinsurers’ balance sheets have not been affected by inflation or interest rates… At 1 January, there was some talk, [then] a lot more at 1 April, and now at 1 July, when we see substantial spikes in inflation and significant instability in investment markets, that has really come to the fore,” said Vickers. “Why does it matter? It is driving reinsurers to reduce volatility. Because they have less stability in their overall balance sheets, it makes it more important to reduce volatility in their results, allied to the fact they have less retrocession cover. When reinsurers look to reduce volatility in their portfolios, the first thing they look at is nat cat,” he said. To view Aon’s Reinsurance Market Dynamics report click here

Reinsurance market moving towards ‘true hard’ territory as buyers struggle at mid-year renewals: Aon

Want to read this article?

Read Next

IASB meets in China to discuss climate reporting

‘Pressure rising’ on developing Asian aging risk: ADB

European business confidence in China plummets

Starr Insurance opens new operation in Korea

International SOS warns of ‘burnout epidemic’

IASB meets in China to discuss climate reporting

‘Pressure rising’ on developing Asian aging risk: ADB

European business confidence in China plummets

Starr Insurance opens new operation in Korea

International SOS warns of ‘burnout epidemic’

Want to read this article?

Read Next

IASB meets in China to discuss climate reporting

‘Pressure rising’ on developing Asian aging risk: ADB

European business confidence in China plummets

Starr Insurance opens new operation in Korea

International SOS warns of ‘burnout epidemic’

Related Articles