Re/insurance broker Aon continues to see value in the global reinsurance industry, even as markets evolve in the wake of the COVID-19 pandemic.
Reinsurance remains an accretive form of capital for insurers in managing volatility and Aon notes that risk transfer over the last six months has demonstrated the value reinsurance provides to actively trade risks in the market.
Headwinds for the industry include evolution of COVID-19 related losses and coverage as well as trends that were emerging prior to the pandemic such as combined ratio results, social inflation, catastrophe loss experience driven by more secondary perils, and low interest rates.
But despite these challenges, the market has also seen counterbalancing forces, including a rebound in global reinsurance capital through Q2, capital raises of around $8 billion, quick adaption to virtual working environments, and continued adoption of efficient technology and risk transfer platforms.
Aon believes these factors have preserved the ability to match capital with desired risk transfer and it expects these trends to continue for upcoming January renewals.
Throughout the last six months, some global insurers were able to effectively increase property catastrophe risk transfer to mitigate further COVID-19 losses and peak zone capacity renewed in a relatively orderly fashion during the spring.
Should these dynamics persist, Aon expects to see slight increases in demand for property catastrophe at the January renewals as insurers face a heightened view of risk and volatility, and pressures from rating agencies.
And more broadly than catastrophe risk, industry reserve dynamics and recent rate increases also suggest that there is potential increased demand.
Global reinsurance capital ended Q2 at just 2% below year-end 2019 at $610 billion, despite a fall to $590 billion at the end of Q1. Combined with new issuances, traditional reinsurance capital now stands at $519 billion.
While alternative capital remains impacted by trapped capital from historical losses, Aon argues that the diversification aspect of reinsurance risk will continue to draw investors.
It also remains a significant portion (~15%) of global reinsurance capital for the market ending Q2 at approximately $91 billion.
To date, insured global catastrophe losses stand at $54 billion for the year, which is below full year 2019 estimates of $75 billion, but Aon still sees cause for concern when it comes to cat losses.
For example, more than 60% of 2020 insured losses have been caused by secondary perils and eight of the last ten years have seen higher economic losses from secondary perils than primary perils.
“These industry trends coupled with higher quality claims information demonstrate the need to better harness data and analytics, and develop custom views of insurer risk that can further improve the ability to trade catastrophe risk,” the broker concluded.