Aon panel: Industry heads to 1.1 with greater capacity certainty

The industry heads towards the 1 January reinsurance renewals with greater certainty about the capacity that will be on offer, with the trapped collateral concerns that impacted the sector last year not currently an issue, speakers suggested during an Aon-hosted webinar that included executives from Inigo, Hiscox, Arch and Hannover Re.

Speaking during the webinar, Russell Merrett, Inigo’s chief underwriting officer, said this time last year in the early run-up to the 1 January 2023 reinsurance renewals, “capital was really pretty stressed because Hurricane Ian was either just about to happen or had just happened”.

“There was tremendous uncertainty about what impact that would have on people’s balance sheets, and in particular, what it might do to the insurance-linked securities world and what might be trapped collateral, and therefore the sort of lack of capacity that might have been available for 2023.”

But Merrett said it feels like that has now worked its way through the system, with the industry set to take a $40bn to $50bn hit from the storm, an event that the Inigo executive said “has been a much more manageable catastrophe than perhaps we feared”.

“Some of the capital that was really nervous has calmed down,” said Merrett.

“I feel like as we go into 2024, there's just much more certainty about the available capacity in the insurance and reinsurance cat world.

“And certainly that was the vibe I took from Monte Carlo last week - that many of the people that we speak to - who we sell to, and buy from - were feeling pretty calm about what was about to happen and confident of our ability or their ability to offer capacity.

“That just wasn't there if you roll back to sort of last November,” noted Merrett.

Hiscox Re’s “strong” cat appetite

Kathleen Reardon, CEO of Hiscox Re & ILS, said her company is heading into 1 January looking to maintain its “strong appetite” for catastrophe business.

“The demand will continue to go up [for that business],” she forecast.

Aside from catastrophe business, Reardon said that after Hiscox Re & ILS pressed pause on writing mortgage and surety coverage during the pandemic – two classes she noted are a “bit more correlated with the economy” – the company is now back out in the market with those offerings.

And in marine and specialty business, Reardon said Hiscox Re & ILS has supported clients as they navigate the Russia-Ukraine crisis and as their composite covers were unbundled to reflect the elevated exposure in each of the various specialty classes.

“We certainly have a continued growing appetite [in specialty lines],” Reardon stated.

Arch Capital Group has grown its reinsurance business substantially during the first half of this year, with its $5.0bn of gross premiums written for the period up 29.8 percent.

Maamoun Rajeh, chairman and CEO of Arch Worldwide Reinsurance Group, said his firm “remains bullish” on the reinsurance market for several reasons.

“First, our thesis is there is a step change in the view of risk across the industry,” he said.

“There is this recalibration of risk premium and to the cost of volatility, and we think that will continue. We don't see any reason that that changes.

“We’re also heartened by insurable values are growing. Inflation is playing a role here. The risk pool is expanding, and we expect to see some growth coming out of increased demand from clients,” the Arch Re executive noted.

Rajeh added that “the ecosystem is healthy”.

“This is an environment where it's not a lack of capacity that's driving this market in my mind, it's just this need to achieve returns on that capacity.

“And so our clients… are in a healthy place. I think the insurance industry is getting rate above trend. And so as a reinsurer, you like that your clients are healthy. It means that they have a less difficult time passing on some of those economics to you as a reinsurer,” Rajeh stated.

Casualty draws attention

While much of the focus during the recent Rendez-vous de Septembre in Monte Carlo was on property, and in particular catastrophe-exposed business, panellists on the webinar were keen to highlight casualty concerns and the need for further changes in that segment.

Indeed, Sven Althoff, member of Hannover Re’s executive board responsible for property and casualty, said his company is “hoping to see a little more concentration and attention also on the casualty lines of business at 1.1 and throughout next year”.

“Let's face it, we are still in an inflationary environment. After the Covid break, courts have started to work again, and if you look at the social inflation [and] nuclear verdict kind of awards, both from a frequency and severity point of view, the catching up has happened quicker than maybe we all expected.”

When it comes to casualty, Andy Marcell, CEO of Aon Risk Capital and CEO of the company’s Reinsurance Solutions arm, noted there are “a lot of people posturing [that ceding commissions] are going to substantially change”.

“It’s super complicated,” Rajeh said of the casualty reinsurance market. When clients were securing material rate increases on the original business, Rajeh said “it was rational” for ceding commissions to increase.

“At a time when that's less so, then it becomes less rational to do so,” the executive stated.

Even aside from the inflationary environment, Rajeh said “adverse development is real and it’s happening”.

“What that does is it just resets the baseline of what price adequacy going forward looks like.”

Factoring in issues such as rates falling behind loss trends, the impact of nuclear verdicts, the increasing complexity of risk, and the growing influence of the litigation funding industry, Rajeh said market conversations need to stretch “well beyond just a couple of points of ceding commission reductions”.

“[It becomes a focus on] how are you going to ensure that your priced-for 85 combined ratio is not really 140,” he stated.