Reinsurers that still have significant appetite for cat risk can leverage their position to become more meaningful partners for cedants across a broader range of products to grow in established segments such as casualty as well as emerging areas like intellectual property (IP), according to Aon’s Andy Marcell.
In an interview, Marcell, who is CEO of Aon’s Reinsurance Solutions business, acknowledged the realities of the capacity imbalance in property cat and the drivers behind it, but said that the sector shouldn’t become fixated on the issue.
“We do a lot of things besides property cat. We’re excited about the state of the casualty insurance market globally, and the reinsurance appetite for it,” said the executive.
As previously reported, there are signs of moderation in some segments of casualty – and in public D&O within professional liability there has been meaningful softening in insurance pricing in recent months.
With mounting concerns about the impact of social inflation, that has led to suggestions that downward pressure on cede commissions for casualty quota shares will increase at upcoming renewals from historically high levels as reinsurers look to offset a perception of elevated risk as rates also come off.
While recognising that reinsurers will likely push to get a better deal, Marcell said the dynamics of the business remain highly attractive to them, with underlying portfolios seeing the positive impact of rate increases that have been compounding each year since the 2019 market turn along with shortened limits.
“We think reinsurers are getting the highest net rate per ceded million dollars of exposure. Sure, cedes have gone up, but original limits came down and rates went up, so the net net for the reinsurers is probably one of the best rating environments they have experienced.
“Of course, there are concerns about social inflation and the impact on reserves, but I think that continues to strengthen the resolve of insurers to hold rate levels and not expand limits tremendously and to be disciplined in their underwriting. So, it’s a great time to be a casualty reinsurer,” he argued.
That means casualty market dynamics are likely to be stable as renewal discussions progress, with limited upwards or downwards pressure on cede commissions, Marcell suggested.
But he also said that the different buying motivations at cedants would shape renewal dynamics for casualty, and potentially other lines of business.
“All clients are not made equal, regardless of the average band of ceding commissions. For some companies, casualty reinsurance is effectively permanent capital, but for others it’s a conscious choice whether they want to purchase it or not, and that’s a vastly different set of experiences,” he continued.
Where it had been a conscious choice, reinsurers were willing to support increased cedes because the economics were still improving as rates went up and portfolios were de-risked.
In most areas of casualty reinsurance, reinsurers are still getting a “tremendous package of risk” that will be better on average than it was last year, Marcell claimed.
“In that environment, cedants still need to buy a product that does something for them on the commission side to make it worth their while to actually transfer the risk,” he added.
The alternative could see large, well-capitalised insurers with a discretionary approach to casualty reinsurance buying retain the risk instead.
Leveraging relationships to grow
However, Marcell suggested that reinsurers that are more willing to support cedants in a tight property cat market could reap the benefits in other areas of their portfolio.
“I think it will be a pretty stable environment overall, but where those reinsurers are stepping up and helping in the nat cat space they will be asking for more of a showing if they don’t already have it in the casualty space,” said the CEO of Aon’s Reinsurance Solutions.
“If hurricane capacity becomes as rare as people fear it might, then the reinsurers would use that to influence their ability to see a broader range of products from their senior company partners.”
Marcell also highlighted other growth opportunities for reinsurers, including established areas like specialty and emerging areas of risk transfer such as IP.
As has been well documented, specialty lines such as marine, aviation and political risk have faced challenges in 2022 amid the fallout from the Russia-Ukraine conflict.
Marcell said the market had responded “reasonably well”, both in rate and articulating the industry’s exposures.
“There hasn’t been a mass panic and people are thinking about how to best protect their businesses and take the opportunity of a positive rate environment.
“There will certainly be new opportunities both in the types and the amount of protection that’s purchased,” he observed.
Meanwhile, Aon has been at the forefront of a number of new product innovations in other segments, including the emerging risk transfer area of IP.
This too represents a significant growth opportunity for reinsurers, said Marcell.
Aon’s reinsurance arm has been working closely with the firm’s commercial risk business under the Aon United banner to innovate the product, in a similar vein to its pioneering development of the mortgage reinsurance market for government-sponsored enterprises over the last decade or more.
Initially, insurers largely participated in early IP transactions on a net basis. But after a number of successful transactions the deal size has been growing and with it the demand for larger amounts of capacity.
“You solve that in two ways: by getting people to write bigger lines and by having more people write the business – both of which are happening. And on the bigger line size we’ve done several quota share reinsurance transactions that have been successfully placed,” he said.
Marcell said that reinsurers have so far been “dipping the toe” and would require further education about the nature and benefits of the product.
But here too leverage could come into play, with cedants that have a broader relationship with a reinsurer in a better position to gain support in an emerging segment such as IP.
ILS will not have meaningful capacity impact… yet
Heightened alternative capital activity in the casualty (re)insurance sector is a welcome addition but is not expected to have a meaningful impact on the way the product is bought and sold, at least in the near term, according to Aon’s Marcell.
He noted the emergence of players such as Vesttoo and Longtail Re, which along with others including Ledger Investing and Multi-Strat have been bringing ILS capital via a range of structures to areas including the US program sector.
“We have partnered with some of those players on reinsurance as well as insurance with our commercial risk colleagues, where we’re trying to build new limits for new products.
“I hope more of them come to market to help solve the challenges we face. To have new capital come in with different ways of thinking about risk is great,” said Marcell.
However, he suggested that at least in the short term these types of funds will not have a marked impact on the way casualty reinsurance is purchased, although he wouldn’t rule it out longer term.
“Hurdles like developing more nuanced products and building cedant relationships can be overcome over time. But in the end it requires commitment to a long-tail casualty product, to transfer risk on a permanent basis, and that is something those companies will struggle with,” the executive said.
“That doesn’t mean they don’t have a place in the solution set though.”