Aon analysts have described the capital-raising activity following the start of 2020 as having left the global supply of reinsurance capacity broadly unchanged.
Overall, supply is considered sufficient to meet foreseeable reinsurance demand, but is likely to be deployed at better terms than have prevailed previously.
Aon considers poor reinsurer earnings since 2017 as the principal driver of the tightening market conditions.
Over the last five years, the combined ratio and return on equity for the ARA is reported to have averaged around 101% and 5%, respectively, resulting in growing external pressure from investors and rating agencies.
Another driver is the ongoing uncertainty around the ultimate cost and distribution of COVID-19 losses.
Aon notes how Lloyd’s has continued to insist that the eventual gross claims burden will exceed $100 billion, whereas reported net losses across the industry aggregated to less than $30 billion at September 30.
Social inflation’s potential threat to casualty reserves is identified as a second area of uncertainty.
Underlying loss trends are deteriorating and COVID-19 is likely to have exacerbated the situation.
The practical effect is that prior year reserve releases will provide more limited support to reported earnings going forward.
Aon says other headwinds to 2021 performance include recessionary pressures on premium volumes, higher costs of retrocession protection and historically low interest rates.
Against this backdrop, risk appetites are changing. Argo’s sale of Ariel Re, Markel’s decision to conduct all property catastrophe reinsurance underwriting via Nephila, and the cessation of underwriting at Kelvin Re and Humboldt Re are all reactions to volatility.