Mike Van Slooten, head of business intelligence at Aon Reinsurance Solutions, tells GRM’s Garry Booth what forces are at work in the run-up to the 1 January European reinsurance renewals
The last five years have been a difficult period for reinsurers three reasons
Firstly, the intensity and frequency of nat cat events. We’re already through $100bn insured losses this year and half a trillion for the last five years. That makes it an unprecedented period for the insurance industry as a whole. Reinsurers are designed to absorb volatility and they’ve certainly taken their share of the load. The same is true of the retrocession market, where capacity is now constrained.
Secondly, the entire market has operated in a very low interest rate environment, which presents a drag on investment returns. Historically, this has been a significant earnings driver for reinsurers and they’ve been under pressure to improve underwriting returns to make up the difference.
Thirdly, Covid-19 has generated significant losses for reinsurers in both the life and non-life segments, and sadly this continues to be an ongoing event in terms of excess mortality. There is also ongoing uncertainty around reserving positions, notably for BI/contingency losses, as well as the possibility of additional claims emergence from longer-tail classes.
Investors are concerned about reported results and the future implications of climate change
In many cases, reinsurer results during the last five years have not been in line with the expectations of management teams, investors or ratings agencies. Investors are now questioning whether reinsurers are pricing for the effects of climate change, which is putting pressure on reinsurers to address the volatility that’s being seen in their results. That is likely to result in upward pressure on the pricing of catastrophe covers at the year-end, and potentially not only in the areas that have been affected by losses this year.
That said, with more data available than ever before, reinsurers have a good picture of where they are making and/or losing money – by territory, line of business or client – and can react accordingly. Buyers that have good data, strong reinsurer relationships and a positive story to tell can still achieve good outcomes.
There is still a lot of capital in the market – the upward pressure on pricing is being driven by the need to improve earnings
The three main events that generated reinsurance losses in 2021 were winter storm Uri in February, the European floods in July, and Hurricane Ida in August. These are earnings events. Reinsurers continue to be well capitalised and there will continue to be strong competition for good business. However, cedants that have delivered nasty surprises will likely be facing difficult conversations.
After another cat-affected year, reinsurers have stepped up the rhetoric and appetite for cat business appears to be waning in some cases, despite the strong capital positions. Others are well positioned to grow if pricing meets their terms. It’s a sign of the pressure that management teams are now under to achieve their target returns on capital.
Is third-party capital an influence on reinsurance capacity and therefore pricing this year?
We’d seen a resumption in the growth of alternative capital up until the third quarter and the property cat bond market in particular looks set to have a record year. However, the European floods and Hurricane Ida have resulted in losses to the retro market and resulted in additional collateral being trapped. This is discouraging for investors, who already had concerns around climate risk. With little sign of new money coming in, there will be less alternative capital available to serve the retro market at the year-end, which in turn will put upward pressure on reinsurance pricing.
Is the trend for casualty reinsurance pricing following property? Is there an appetite for casualty among reinsurers?
It’s a mixed picture. There are concerns around the impact of inflation in its different forms: economic, loss cost and social. However, most casualty insurance lines have benefited from significant price increases over the last few years, and reinsurers writing proportional programmes have obviously benefited. Once again, there will be strong appetite for good business.
There is strong demand for aggregate reinsurance
Aggregate covers have tended to work very well for cedants during the last few years, as a way of dealing with the volatility associated with event frequency. Reinsurers have absorbed significant losses from this source and adjustments can therefore be expected, in terms of pricing and retentions. It is likely that some reinsurers will look to move up XoL towers as well, in an effort to mitigate the impact of event frequency.
The implications for specific corporate insurance lines
Cyber is one of the most challenging areas at the moment. It is high on the list of priorities for corporate buyers, but carriers and their reinsurers are struggling to fully understand the loss potential. Concerns have been heightened by the elevated cost of ransomware claims in 2021.
More broadly, the uptick in commercial insurance pricing has caused more corporates to increase their retentions and Aon’s captive management practice is very busy… it’s a natural reaction to prolonged market hardening.