It’s not over yet: tough times for reinsurance

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Joe Monaghan, Aon Global Growth Leader, offers a key takeaway from the report titled “Reinsurance Market Dynamics: January 2023,” said Joe Monaghan, Aon Global Growth Leader: “The challenges we faced on January 1 will continue as we move into April May, June and July enter renewal,” speaking on a video accompanying the report. “But we placed the limit, we negotiated contracts and we found a successful landing to move forward in many trade relationships,” he said of the January period, expressing the hope that the same would happen later in the year.

Using a phrase Gallagher Re representatives also used in their assessment, Monaghan said this was the toughest Jan. 1 renewal “in a generation,” highlighting the challenges facing “real estate industries, including real estate cats across all regions, workforce programs and aggregated coverages Prices for U.S. real estate cat and global real estate repurchase activity hit “multi-decade highs” on Jan. 1, Aon said.

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Monaghan distinguished the drivers behind the high prices for the January 1 this year period from others in the industry’s history, emphasizing that “it was not just driven by losses. It was driven by a number of factors outside of the reinsurance industry – and those factors will continue for the foreseeable future,” he said.

Referring to the loss factor common in other tough renewal seasons, Aon said insurers’ desire to buy more limit at 1/1 collided with reinsurers’ need to reduce volatility and improve profitability after a series of bad results since 2017. Specifically over the six years ending in 2022, a group of 17 reinsurers analyzed by Aon (Aon’s Reinsurance Aggregate) posted an average combined ratio of 101 and an average return on equity of 5 percent.

“This is one of the driving forces behind current underwriting discipline,” the report said.

But it wasn’t the only one.

The challenges were compounded by high inflation, limited availability of retrocession capacity and shrinking reinsurer equity. The drop in retro capacity followed Hurricane Ian in late September 2022, Aon said.

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Aon estimates that global reinsurance capital has fallen 17 percent to $560 billion in the nine months to September 30, 2022.

(Editor’s note: While the percentage drops calculated by Aon are similar estimates from other brokers, the dollar amount in Aon’s capital total is higher. For example, Howden reported that its allocated reinsurance capital had eroded 15.7 percent to $355 billion by the end of 2022. In the past, Aon executives have explained this kind of discrepancy by noting that the total counts “every aspect dedicated to disaster risk taking for insurance companies”, including “all capital in platforms where a carrier writes both insurance and reinsurance” and government funds that provide reinsurance-like capital.)

While “meaningful new capital” did not enter the reinsurance market at 1/1, Aon said “encouraging signs” emerged in December as “reinsurers looked to take advantage of improved terms.” While capacity entering the reinsurance market failed to make up for outflows earlier in 2022, new capital could come in in the first quarter, lured by more assured returns. “Capital entering the reinsurance market in 2023 will be rewarded with strong demand and attractive terms,” the report said, expressing belief that insurance companies will also reassess their retained volatility in the first quarter and may consider additional reinsurance purchases.

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Still, the Aon report included other advice for insurers looking to lower their retained volatility, including tapping alternative capital and considering “integrated placements” of property and casualties.

Aon reported that capacity in the casualty reinsurance market remained abundant during the extension period. As reinsurers showed increased interest in the class, a number of cedants explored options “to build cross-program casualty portfolio support to build capacity for real estate disasters, leveraging certain reinsurers’ desire to identify diversified growth opportunities.”

As for real estate retro, “new capital is being attracted to the retro market by higher rates and improved terms, but capital inflows have not kept pace with outflows and increased demand to relinquish more risk to third parties,” it said. report.


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