Aon’s latest Reinsurance Market Dynamics: June and July Reinsurance Renewals says that the current demand for catastrophe bonds is outpacing the ability of the industry to supply them.
According to the report, the current situation has arisen because insurers and reinsurers have turned increasingly to alternative capital markets to supplement traditional reinsurance and maximise placements in a challenging environment.
Joe Monaghan, global growth leader for reinsurance solutions at the firm, writes in the report: “Following several years of above-average catastrophe claims, reinsurers reduced their appetite for catastrophe exposure at the June and July renewals.
“For the first time since the U.S. hurricanes of 2004 and 2005, property natural catastrophe capacity contracted materially, and some reinsurers would not write certain risks – such as lower layers of reinsurance limit for Florida catastrophe risk – at any price. Specialty also faced its most challenging renewal in a generation, reflecting the potential for large losses from the Russia-Ukraine conflict. In contrast, the casualty reinsurance market remained stable, although concern for social inflation and emerging risks also made for more challenging renewals.”
He adds: “Inflation and volatility in investment markets, combined with elevated natural catastrophe losses, drove demand for higher reinsurance limits. Increased demand, however, was met by capacity constraints as reinsurers came under mounting pressure from investors to address earnings volatility and reduce catastrophe exposures.”
Monaghan writes in Reinsurance Market Dynamics that Q1 2022 saw industry capital decrease, a movement that was driven by unrealised losses on bonds that can be linked to rising interest rates.
He adds: “Total reinsurer capital stood at $645 billion at March 31, a $30bn reduction relative to the end of 2021. Alternative capital, however, increased slightly to $97bn, as investors recognized the value of diversification and increased margins amid more turbulent financial markets.”
Looking ahead, Monaghan writes that the property reinsurance market may be approaching what he a calls a true ‘hard’ market where demand is not being satisfied.
He concludes: “Inflation, economic and financial markets uncertainty, and climate change, will put insurer capital under increasing pressure, just as reinsurers retrench. Attracting new sources of capital to the market, combined with data-led portfolio differentiation, will be essential to meeting insurers’ reinsurance needs going forward.”
