A unique confluence of market uncertainties is set to play out at renewals in 2023, says Aon, a global professional services company and risk solution provider.
In Aon's report, "Ultimate Guide to the Reinsurance Renewal Market Outlook for January 1, 2023", Mr. Joe Monaghan, global growth leader of reinsurance solutions of the company, says that macroeconomic and geopolitical volatility has coincided with an increased frequency of extreme weather events in recent years, causing investors and reinsurers to reassess their view of risk and appetite for natural catastrophe exposures. The mismatch in supply and demand will continue through the January 2023 renewal.
Inflation will be the number one topic at renewal, driving increased demand for catastrophe reinsurance at a time of tightening supply. A number of reinsurers have withdrawn or scaled-back participation in the property catastrophe market, while most are seeking to maintain existing capacity levels.
Industry capital is under pressure
Global reinsurer capital declined by 11%, or $75bn, to $600bn in the first half of 2022, principally driven by substantial unrealized losses on investment portfolios. Additionally, the strengthening of the dollar against the euro has particularly impacted European reinsurers.
Reinsurers will prioritize cedents that provide detailed exposure data and demonstrate underwriting actions that mitigate areas of uncertainty, especially around the impact of inflation on total insured values. Reinsurers must also be mindful that cedents are equally impacted by the trends that have negatively impacted property catastrophe results.
Attracting new sources of capital to the market, combined with data-led portfolio differentiation, will be essential to meeting insurers’ reinsurance needs going forward. Aon is working hard to create capacity by attracting new capital to the market and expanding innovative risk transfer vehicles.
Among these challenges, there remain opportunities for diversification and growth. The emerging market for intellectual property insurance could one day prove an even bigger opportunity than the now nearly ten-year old mortgage reinsurance market which, to date, has generated more than $8bn of expected ceded premium with less than $20m of ceded losses. The casualty reinsurance market is proving robust, and along with specialty lines, should remain attractive to reinsurers looking to diversify from Nat CAT risk.
Clients that listen to reinsurer concerns and tell a granular story will secure capacity at the best available terms and conditions.
The report suggests that insurers:
Articulate clearly how they underwrite for inflation and its impacts on their risk profile
Leverage data and analytics to differentiate their portfolio at renewals
Develop a custom view of risk to de-risk and reduce exposure concentrations, as well as to improve understanding of secondary perils and emerging risks
Understand the true cost of capital, including volatility of returns, which is critical to optimizing the long-term return on capital
Understand and consider exploring alternative structures for optimal placement results
Partner with an advocate to leverage long-standing relationships with traditional reinsurers, alternative capital investors, and new sources of capital