In a promising turn of events, the global reinsurance market is poised for a more orderly and predictable renewal season ahead of January 1, 2024.
Aon’s Reinsurance Renewal Season 2023 report highlights the positive outlook, citing a strengthening of relationships and a balanced supply and demand scenario, all bolstered by the absence of a significant catastrophe event.
After a reset in property catastrophe pricing and retention levels in January 2023, subsequent renewals in April, June, and July proved more predictable. Reinsurers re-established their risk appetite, and insurers adeptly navigated the evolving market dynamics, leading to a steadier trajectory.
One notable development contributing to this stability is the steady growth in capacity throughout the year. Capital inflows from third-party investors, traditional reinsurers, and insurance-linked securities (ILS) have rejuvenated the market.
The resurgence of the ILS market, in particular, has been instrumental in the property catastrophe sector, sending a clear signal to the traditional segment.
Aon estimates that global reinsurer capital has surged by 10.7 percent, amounting to $620 billion since the third quarter of 2022.
This surge is primarily attributed to retained earnings, recovering asset values, and fresh investments in the catastrophe bond market. While this trend is encouraging, the market still has some ground to cover before reaching pre-pandemic levels.
The reinsurance market’s renewed stability is further reflected in better results in the first half of the year, despite higher-than-average industry natural catastrophe losses.
Reinsurers have achieved an impressive average annualised return on common equity of 17.7 percent, a stark improvement from the previous year’s mere 1.2 percent, albeit on a reduced capital base.
This positive trend is set to continue, with reinsurers showing a heightened appetite for property catastrophe business, especially in middle to higher layers.
Challenges persist in placing lower layers where insurers’ needs are more pressing, but opportunities abound for reinsurers to establish themselves as long-term strategic partners at these attachment points.
Moreover, the casualty reinsurance market remains attractive due to underlying rate improvements and enhanced investment returns. Although casualty capacity is ample, reinsurers are exercising discipline in light of economic and social inflation and prior-year loss developments.
While the market is gearing up for a robust January 1 renewal, it remains vigilant regarding natural catastrophe frequency, which has been a challenge. The first half of 2023 witnessed ongoing high-frequency weather-related catastrophe activity, primarily from modeled secondary perils. However, reinsurers have successfully distanced themselves from these losses, thanks to retention increases and a shift away from providing aggregate catastrophe protection.
With the reinsurance market on a more sustainable footing, insurers and reinsurers can now shift their focus towards innovation and growth. Legacy reinsurance is in high demand, and opportunities are expanding, especially in segments like mortgage reinsurance, which has seen capacity constraints and significant price increases.
The market’s newfound stability and profitability are pivotal in addressing broader challenges within the insurance industry, such as the protection gap in natural disaster coverage.
Aon’s 2023 Weather Climate Catastrophe Insight report reveals that only 43 percent of the $340 billion in damage from natural disasters in 2022 was covered by insurance. There’s a substantial opportunity to close this gap and bolster vulnerable communities and local economies.
Additionally, the reinsurance sector can play a crucial role in addressing emerging risks tied to transformative trends.
Aon’s analysis identifies over $80 billion in premium growth opportunities related to megatrends like the Metaverse, Shared Mobility, and Intellectual Property. Leveraging artificial intelligence through prescriptive analytics could unlock an additional $100 billion in premiums.
In conclusion, while uncertainties may persist in the second half of 2023, the reinsurance market appears more orderly and resilient than before. With this improved stability, the market is now better positioned to collaborate constructively and prioritise client-centric solutions, reinforcing its value proposition and driving innovation to meet the evolving needs of insurers.
