Reinsurance renewals to focus on nat cat and systemic risks, says Aon

Upcoming reinsurance renewal discussions are set to focus on natural catastrophes and systemic risks, according to Aon. At a pre-renewal webinar, the reinsurance broker said low interest rates, natural catastrophes and pandemic losses have been driving rate changes in the reinsurance market. However, despite mounting catastrophe losses, the sector has seen strong capital growth and improved profitability in the first half of 2021, it said. Going into the January renewals, reinsurance capital is “plentiful” while deployment is “disciplined”, according to Aon. Reinsurance capital levels increased by $10bn in the first half of 2021 to $660bn, its numbers show. The figure includes alternative capital of $97bn, which was $3bn higher in the first half due to strong demand for catastrophe bonds, according to Aon data. Andrew Marcell, chief executive officer at Aon Reinsurance Solutions, said that while reinsurers and insurers have access to capital, they are questioning whether they are being “rewarded for the volatility” from natural catastrophes. He said there is a debate on shifting property and casualty portfolios within the industry. Since Mr Marcell made these comments, French reinsurer Scor announced plans to grow its non-catastrophe reinsurance and specialty business in a bid to reduce the adverse impact of nat cat volatility on its portfolio. According to Mike Van Slooten, head of business intelligence for Aon’s reinsurance unit, there is “good news and bad news” for reinsurance buyers as they approach the all-important January renewal. “The reinsurance market has generally performed well in 2021 and capital has continued to build from an already strong place. But the bad news is the natural catastrophe activity in 2021, which is already threatening underwriting performance in the first half,” he said. According to Aon, major loss activity in the second half of this year, including European floods in July and Hurricane Ida in August, could “derail” reinsurers’ earnings in 2021. The broker noted that the hurricane season is still in its early stages, while inflationary pressures are a concern. In Europe, Aon predicted that flood losses could impact local renewals. Mr Van Slooten said natural catastrophe losses will be a “hot topic” for the January renewal negotiations. The insurance industry faced a $40bn bill from natural catastrophes in the first half – the second-highest total for the period on record – according to Swiss Re. In addition, it now looks set to pay out at least a further $30bn from Hurricane Ida in August and the flooding in Europe during the summer, said Mr Van Slooten. Preliminary data suggests that the industry is close to the ten-year average annual loss with four months of the year yet to run, explained Mr Van Slooten. “The 2021 Atlantic hurricane season was predicted to be an active one and we’ve already seen five hurricanes and 12 named storms. Looking ahead to the renewals, there will be quite a bit of sensitivity as to what happens for the remainder of this year,” he said. These losses also add to the “considerable burden” of Covid-19 claims facing the reinsurance industry, he continued. These losses are approaching $50bn, with $13bn falling on the four big European reinsurers. While reinsurers incurred only modest P&C losses in 2021, claims may still emerge from longer-tail classes, while some firms incurred substantial losses from life and health claims. With “material uncertainty” surrounding Covid-19-related business interruption (BI) losses, reinsurance recoveries for BI claims will also likely feature in discussions between reinsurers and insurers at renewal on a case-by-case basis, added Mr Van Slooten. Systemic risk is another important factor for renewals, according to Aon. It expects reinsurers will look to further tighten terms and conditions for systemic risks, with pressure to include exclusions. During the past 18 months, reinsurers have sought to exclude or limit systemic risks in areas like pandemic and cyber. According to Aon, ransomware losses are keeping cyber exposures in focus. During the first half of 2021, reinsurers posted strong premium growth, boosted by rate increases and demand, said Mr Van Slooten. Reinsurers are also beginning to see the benefits of recent rate increases earning through for the first time in H1, with a reduction in both the attritional loss and expense ratios. The average combined ratio for the largest reinsurers was just 93.9% in the first half, significantly down on the four-year average of 102%. Return on equity also rebounded to 13.4% in the half, up from an average of less than 5% for the period 2017 to 2020 that was below the cost of capital, Mr Van Slooten said.

Reinsurance renewals to focus on nat cat and systemic risks, says Aon

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