After a challenging year for many cedents, insurance and reinsurance broker Aon has reported a “relatively smooth” January 1st, 2024, reinsurance renewal, characterised by a rebound in profitability, rebuilding capital positions, and increased availability of retrocession capacity.
Aon’s latest Reinsurance Market Dynamics report notes increased appetite from reinsurers at 1.1 2024 at the enhanced terms secured during 2023, as well as support from elevated primary insurance pricing.
However, the global broker warns that ongoing uncertainty around the impacts of climate change, inflation, litigation funding, and heightened geopolitical risk on loss costs are “keeping potential investors on the side-lines,” and this is despite the expectation that many reinsurers will “easily” cover their cost of capital in 2023.
“Capital buffers had already been eroded by unrealized investment losses going into 2023 and many were carrying less reinsurance coverage principally in the form of higher retentions forced by reinsurers in 2023,” says Aon.
On top of this, 2023 was another year of elevated insured catastrophe losses of more than $100 billion, driven by the severe convective storm peril, and higher attachment points achieved by reinsurers during 2023 renewals meant that the primary market absorbed a larger share of the losses than in previous year.
“There was also adverse loss development in France and Germany from prior year events. These losses further eroded capital, introduced more volatility into underwriting results and resulted in increased rating agency scrutiny for many insurers which has driven some increased demand for reinsurance protection going into 2024,” adds the broker.
For the most part, reinsurers were actively trying to achieve their desired signings at the important January renewals given the level of returns at improved pricing, terms and conditions, says Aon.
On a risk-adjusted basis, reinsurance pricing was flat to modestly up across most lines of business at 1.1 2024.
Importantly, Aon notes that both insurers and reinsurers were eager to improve relationships and many sellers of protection “strategically targeted key clients with whom to grow as they sought to secure broader diversification of their global reinsurance portfolio.”
Although, this was not the experience for programmes, segments, and regions that ceded significant losses to the market in 2023 and from whom reinsurers demanded significant price increases for this year, explains the broker.
In the property space, demand for coverage was “robust” at the January renewals, and cat limit purchased globally rose by low to mid-single digits year-on-year, with inflation continuing to play a role.
“Insurers recognize the opportunity to purchase additional capacity at the top of their programs but are generally constrained by the reality of budgets and current pricing levels,” says Aon.
Interestingly, Aon also notes that most reinsurance companies entered the renewals with a view to expanding in the property cat space, which resulted in a more consistent approach to both pricing and terms.
In the casualty sector, Aon’s report highlights a tougher stance from reinsurers amid prior-year reserve deterioration and concern for adverse litigation trends. In contrast, others recognised the earnings potential of improving casualty pricing and higher interest rates, suggesting appetites varied, although, according to Aon, capacity was ample.
“The January 2024 property reinsurance renewal sets the stage for an interesting year ahead,” says Joe Monaghan, Global Growth Leader, Aon’s Reinsurance Solutions. “Demand for property catastrophe reinsurance remains strong at the start of 2024, supported by inflation and exposure trends. As capacity continues to build, there will be opportunities for insurers to buy additional limit at the top of programs, and for reinsurers to work with brokers and clients to share the burden of secondary perils more equitably.”
“The increases in retentions a year ago have mitigated reinsurer losses and contributed to their positive returns in 2023. But this has come at the expense of increased retained losses for insurers many of whom are struggling to achieve the improvements in primary pricing and underwriting which are often slowed by regulatory approval process quickly enough given their limited sources of capital to sustain increased catastrophes.
“We must work collectively to create the solutions necessary to sustain re/insurance symbiosis.”
