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Challenging times for aviation, specialty lines remain attractive to reinsurers: Aon’s Skilton

21st March 2023 - Author: Kassandra Jimenez-Sanchez

Aviation lines face challenging reinsurance renewals in 2023, yet specialty lines continue to provide reinsurers with opportunities, according to Aon’s Global Head of Specialty and Aviation, Mark Skilton.

Having experienced complex and challenging reinsurance renewals on January 1st, aviation insurers face an uncertain market in 2023, a trend that according to Skilton, is expected to continue into the second quarter.

“Against the backdrop of the Russia-Ukraine conflict, programmes saw significant rating increases in tandem with coverage restrictions as reinsurers pushed to limit War peril write-backs within all-risks policies and move them into the specialist war market,” Skilton explained.

He added: “The January 1st renewal cycle saw the aviation reinsurance market experience its most challenging period in over two decades following a period of unprecedented losses, namely a recent material reserve deterioration on a historic large aviation claim, as well as uncertainty surrounding potential exposures arising from the Russia-Ukraine conflict.”

Skilton highlighted that, compared to the reinsurance trading environment, aviation insurance rates stabilised in 2022 after several years of increases that began in 2018.

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However, as it is anticipated that reinsurance rates will continue their current trajectory along with tightening conditions, aviation insurers now face the prospect of passing on significantly higher reinsurance costs to policyholders, many of which renew in the fourth quarter, or they might have to consider reducing their capacity.

Russia-Ukraine conflict has also affected marine reinsurance renewals, with losses yet to materialise, Skilton noted.

Composite or whole account marine reinsurances are exposed to potential losses related to the conflict, with possible claims arising from marine war, aviation war and war on land covers.

Skilton said: “At 1/1, programs were ultimately completed with rate rises and restrictive language relating to the war in Ukraine. Many of the coverage items are not fully resolved and will continue to form part of negotiations for future renewals.

“Marine and energy reinsurance capacity was still in plentiful supply at 1/1; however, the deployment of capacity on composite reinsurance programmes was more disciplined than in recent years, particularly for those covering terrorism and political violence accounts.

“Although capacity was widely available, there was a lack of consensus amongst leading reinsurers as to how to approach exclusionary language relating to the ongoing conflict.”

In its commentary, Skilton also highlighted that while aviation reinsurance is undergoing a period of adjustment, specialty lines remain attractive to reinsurers as they provide opportunities for growth and diversification outside property cat reinsurance.

For example, January renewals for trade credit, structured credit and political risk, and surety reinsurance treaties, were completed with relatively little disruption to structures, terms and conditions and panel compositions.

Skilton explained: “While the wider market challenges had an impact, the recent positive results of these classes in the 2020, 2021 and 2022 underwriting years helped mitigate the desire of reinsurers to price programs higher, and the growing geopolitical and economic uncertainty.”

Demand for cyber reinsurance is also increasing as cyber insurers are now looking to resume growth. This is due to cyber insurers finding themselves in a much-improved position following significant underlying rate increases and underwriting actions taken to address a spike in ransomware losses.

Additionally, there is a growing interest in event-based structures, Skilton added, such as non-attritional excess of loss covers, which provide reinsurance protection for systemic or catastrophe cyber events.

There are also opportunities for reinsurers in agriculture as it has a promising outlook for 2023, with enhanced opportunities for reinsurers to generate profits and improve historical margins.

“Last year is looking generally profitable for reinsurers, with significant improvements to the original insurance business for 2023,” said Skilton.

“The agriculture reinsurance market saw significant tightening in terms at the January renewal, driven by recent losses and capacity constraints, as well as increases in commodity prices and exchange rate movements – the strengthening of the U.S. dollar meant that 40 percent more capacity is required over last year for the U.S., the world’s largest crop insurance market.”

Lastly, another reinsurance market that also continues to provide reinsurers with good opportunities is the U.S. mortgage, Skilton highlighted.

Even though this market is a relatively new line of business – having started in earnest in 2012 following the 2008 financial crisis -, it has grown consistently ever since, creating welcome diversification for the reinsurance industry.

2022 was an extremely active year, with government-sponsored enterprises and U.S. mortgage insurers purchasing significant volumes of reinsurance protection.

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