Reinsurance buyers should not expect a “business as usual” renewal, according to Mike Van Slooten, head of business intelligence for Aon’s Reinsurance Solutions.
Van Slooten told The Insurer that the challenging operating environment meant reinsurers were being increasingly careful about how they were deploying their capacity.
“This may 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.
“Reinsurers have absorbed a lot of volatility over the past five years and deserve credit for having done so with minimal impact to capital adequacy and ratings,” he said.
However, earnings have suffered and some capacity is exiting, particularly for property catastrophe-exposed business, with not a lot of new capital coming in.
“It’s a bifurcated market – not everyone is pulling back, but there are not a lot of signs of new capital or new entrants coming in. This may change if we see more loss activity.
“Inflationary pressures are also 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.
Challenging investment environment
Van Slooten said 2022 will likely be another challenging year from an earnings perspective, because of what has happened on the asset side of the balance sheet.
The faster-than-anticipated rise in interest rates has undermined bond values, resulting in large unrealised losses in the first half of the year.
While he acknowledged the short-term adjustment was painful, he said that most of the impact was “accounting noise” and more of a timing issue.
“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.”