Preparation will be key to securing successful reinsurance renewals at 1 January, according to Mike Van Slooten, head of business intelligence for Aon’s Reinsurance Solutions.

Mike Van Slooten Aon

Van Slooten told The Insurer that Hurricane Ian had added another layer of complexity to an already very challenging operating environment, with reinsurers set to become ever more careful around the deployment of their capacity.

“This will result in some difficult conversations, but there are things buyers can do to optimise their positioning for the renewal negotiations.

“The ability to articulate how you are managing inflation in your own book and your own views of risk will be critical, alongside the quality of your data,” he said.

Van Slooten said the picture at 1 January will be one of increasing demand and constrained supply.

“Inflation will drive demand for higher limits and buyers will still be seeking earnings protection, to the extent that it is available.”

At the same time, earnings volatility is causing some reinsurers to rein in their risk appetite, particularly for property cat business, with little sign of new capital coming in.

Inflationary pressures are a factor. Property rebuild costs are at elevated levels and there are concerns about social inflation in the casualty market as well.

“Reinsurers will look to address rising loss cost trends through higher pricing, in the absence of compelling counter-arguments,” Van Slooten said. 

Strong cat bond market

In the alternative capital space, Van Slooten said the property cat bond market has remained strong.

“Buyers are looking across the spectrum of available products, because the availability of traditional capacity is becoming more constrained,” he said.

Cat bonds have become relatively more attractive, including for reinsurers looking to secure retrocession protection.

“There is still strong investor appetite in this area, because the loss triggers can be more narrowly defined and the product offers them the ability to trade in and out.

“For private collateralised reinsurance, there is not as much capacity available as there was in the past.”

Van Slooten said that Aon was engaging its global resources and relationships to widen the availability of capital to help clients achieve better outcomes at the renewals.

Another challenging year for reinsurer earnings

Van Slooten said the combined impact of Hurricane Ian and unrealised investment losses would again result in sub-par earnings for the reinsurance sector.

“We now anticipate a breakeven result at best on the underwriting side, while rising interest rates and fears of recession are continuing to undermine asset values and reported equity positions.”

While he acknowledged the adjustment was painful in the short term, Van Slooten said the “pull-to-par” effect would see bond values recover as they approach maturity.

“Rating agencies seem to be treating most of these losses as non-economic – we are not seeing rating downgrades as a result,” he said.

“The industry will work our way through this difficult period, then the benefit will start to feed through – higher interest rates represent a long-term positive for earnings.”