Aon’s Monaghan: Communication and differentiation key to renewal success

The turbulent market environment heading into 1.1 will create a challenging property catastrophe renewal market where data transparency, clear communication, and broad market engagement will be critically important, according to Joe Monaghan, Global Growth Leader, Reinsurance Solutions at Aon.

  • Reinsurers have moved away from low attaching layers and aggregate covers, especially in the US
  • Global reinsurance capital down to $600bn at 30 June
  • Reinsurers concerned over frequency and severity, quantification of secondary perils, rising inflation, climate change impact and strength of US dollar
  • More non-indemnity structures expected to be utilized to bridge caps in coverage

In an interview with The Insurer, Monaghan said there were challenges at the June and July renewals, “and those challenges will continue into 1.1”.

“It is a very turbulent environment,” he said.

In a recent report on the mid-year renewals, Aon highlighted that reinsurers reduced their appetite for catastrophe exposure following several years of above-average catastrophe claims. Property natural catastrophe capacity contracted materially for the first time since 2005, and some reinsurers would not write certain risks, such as lower layers of reinsurance limit for Florida catastrophe risk, at any price.

Monaghan pointed to the factors that are driving concern among reinsurers, including frequency and severity trends over the past five years, the difficulty in quantifying secondary perils, rising inflation, the impact of climate change and the strength of the US dollar.

“All of the factors that are reducing reinsurer risk appetite for property cat, especially for peak zones, are also contributing to increased buyer demand,” he said. “Everybody’s dealing with the same drivers. It’s leading insurers to say we need more protection. It’s leading reinsurers to say we need to sell less protection.”

The market environment also means very limited new capital is coming into the space. Aon estimates that global reinsurer capital totalled $600bn at 30 June 2022, down $75bn from the end of 2021. The drop was driven principally by unrealized losses on bonds, linked to rising interest rates.

Joe Monaghan PQ1

Furthermore, the capital that has come into the market has been focused on non-property cat areas.

“We’ve seen price increases, but we haven’t seen significant new capital come into the reinsurance space in 2022 or in 2021,” Monaghan said. “All forms of capital, whether it’s traditional, collateralized or securitized capital, are facing the same challenges. Now more than ever you need to be connected to the broadest range of capacity.”

As such, the executive said communication is key in a marketplace like this.

“Reinsurers want to see clear, thoughtful, concise evidence of how insurers are already tackling issues like inflation. I don’t think reinsurers want to double count or double dip in terms of the charges they’re making but in the absence of clear evidence of what the primary carrier is doing, reinsurers are making bulk assumptions and adding that into the pricing,” Monaghan said.

He added: “It’s also the case that the models, for example, the third-party catastrophe models don’t have a uniform answer to this. So reinsurers are applying their own factors, and that varies from one reinsurer to the next but could be a double digit adjustment on exposure.”


A stressed system

A concern in a market environment like the current one is that it creates stress on the entire system, Monaghan said.

“It can sometimes become adversarial,” he said. “That’s counterproductive. Our job is to provide our clients with a sound execution strategy supported by strong analytics that enable capacity providers to make an appropriate pricing assessment so that we can complete the placement. It’s important for everyone to reflect upon the fact that the drivers are universal that are affecting both sides.

“Reinsurers are having a difficult time with the retro capacity. Their investors want them to limit the exposure for the same reason the primary carriers’ investor base wants them to buy more protection for the exposure on the nat cat side.”

Monaghan said that stress levels will go up as the market gets closer to 1.1.

“We engaged with clients earlier than usual to develop renewal strategies,” he said.

Joe Monaghan PQ2

Even with that, Monaghan believes it will be a challenging renewal season. He added Aon is utilizing its global resources to identify and engage additional sources of capacity.

On the alternative capital side, Aon believes it is possible to find investors that will support the business and find it a diversifier.

“They have to be convinced that there’s a return to be made,” he said. “We’ve had significant rate increases over the last several years, and going forward, I think investors are trying to determine whether those create a sufficient return. Insurance assets remain an interesting source of diversification for many of the investors with whom we’ve engaged.”

Monaghan added: “The lower attaching layers and aggregate programs, especially in the US, are areas where reinsurers have moved away from the risk, and that’s driven by losses in those layers. That’s also the area where many of our clients need the capacity. We’ll see a lot more non-indemnity structures as we try to find innovative ways to bridge the gap.

“We’re putting strategies in place to secure capacity for our clients before it’s exhausted because reinsurance continues to be one of the most accretive and valuable sources of capital for insurers.”