Aon: competition on top layers of cat programs to exert downward pricing pressure

Aon predicts a 5 to 10 percent increase in global demand for property cat limit at 2024 renewals, which will be met by adequate supply from reinsurers in an orderly renewal where competition for higher layers could create downward pricing pressure.

  • Aon expects global cat demand to be up 5 to 10 percent at 2024 renewals
  • Aon Risk Capital CEO Andy Marcell said increased competition expected at top of programs
  • This could result in some downward pricing pressure, he claimed
  • Aon execs said clients are hoping for improved relationships with reinsurers that were strained at the last January renewal
  • Reinsurance industry capital up 10.7% to $620bn since end of Q3 2022
  • Aon estimates reinsurers’ annualised ROE for H1 was 17.5%
  • Noted that cat losses in 2023 so far have been retained more by insurers

Speaking at a market briefing focusing on reinsurance renewals on Thursday, Aon’s CEO of Risk Capital Andy Marcell highlighted increased competition at the top end of programs that had emerged at mid-year.

“We expect and we’ll be pushing for a reduction in rates in most places where we see competition, and where we see there’s more than adequate pricing. At the top end of programs there is a lot of competition for that risk,” he said.

He noted areas where there has been loss activity – such as the Turkish quakes, Italian floods, and losses in the Nordic countries – while there have been significant severe convective storm losses in the US this year that have accounted for the majority of insured cat losses globally.

“But in the main, a lot of the volatility and the losses that have occurred have been at the lower end of programs, where the global insurers have managed that in their own ways,” Marcell observed.

As previously reported, a key feature of the hard property cat reinsurance market has been the step change achieved by reinsurers in pushing up attachment points on cat covers as well as securing significant rate increases.

Marcell said that some of the global insurers are likely to seek private placements to help manage the volatility lower down in programs.

“However, I would point out that in the global insurance market there are many different types of insurance companies – regionals, mutuals and nationals – and the amount of volatility that is now sitting on their balance sheets is at a place that is challenging for them.

“So they will be looking to find ways to get more frequency cover to the extent possible at affordable prices, and I expect that to be an ongoing discussion through 2024,” the executive continued.

Rebuilding relationships

One characteristic of the 1.1.2023 renewals was tension between reinsurers, reinsurance brokers and cedants, with a lack of clarity or transparency around quoting and appetite in what ended up being a late and chaotic cat renewal.

“I think that the clients are looking for stability, with closer reinsurance relationships as we walk into 2024, and to rebuild a stable relationship in terms of capital management from their reinsurance partners.

“That is something they are uniquely focused on and of course they are very interested to see how the reinsurers react at 1 January,” said Marcell, noting that around 45 percent of the global cat programs placed by Aon’s Reinsurance Solutions are at the key renewal date.

Also participating on the panel of Aon executives was Tracy Hatlestad, global head of property at the firm’s Reinsurance Solutions business.

She said that where last year’s discussion around renewals was centered on capacity, this year the discussion on both sides should be around differentiation: from buyers, in how they approach the market for trading; and for sellers, in how they view specific insurance companies.

“And on the reinsurer side we expect a much more orderly renewal season this year. The way the reinsurers will ultimately show up for that is transparency and pricing... and meeting quote and authorisation deadlines that insurance companies [set] for 2024 renewals,” said Hatlestad.

She added that reinsurers could differentiate themselves and help improve relationships by finding ways to provide additional value to insurance companies.

“One of those is the ability to provide frequency protection for insurers that are definitely retaining more net loss in 2023 – even more than 2022 in some cases – especially around severe convective storm in the US,” the executive commented.

Hatlestad said she is confident that supply will meet demand that is expected to increase by 5 to 10 percent globally for cat, with higher percentages in areas where inflation has been more elevated throughout this year.

“Property cat portfolio returns are expected to cover the cost of capital for reinsurers on a global basis. And the good thing is rates are at a level that should support sustainable demand and capacity growth going forward,” she commented.

Capital returns

Mike Van Slooten, head of business intelligence at Aon’s Reinsurance Solutions division, said that return on equity for reinsurers in an improving environment for them was around 17.5 percent in the first half of 2023 on an annualised basis, with improved combined ratios and the benefit of asset values coming back.

“I think this is providing early evidence for investors that reinsurers are now in a position to make more sustainable earnings going forward. And that’s important because obviously we’re looking for new commitments and we’re looking for new participations in the marketplace,” he commented.

In a report released at the same time as the briefing, Aon said that it estimates global reinsurer capital has increased by 10.7 percent, or $60bn, to $620bn since the third quarter of 2022, driven by retained earnings, recovering asset values and new inflows to the cat bond market.

Photo by David Bull

It added that while the trend is encouraging, there is some way to go before previous levels are attained.

Van Slooten said around $45bn of the recovery had taken place in 2023.

And he noted that incremental capital coming into the industry is estimated to be only around $10bn, around half of which has entered to support cat bonds, with the remainder the result of capital raising from incumbents such as Everest Re and RenRe.

“I think the cat bond market in particular is likely to provide some competitive tension in certain markets around the world as we head into the renewals.

“And I think it’s quite clear from the disclosures on half-year earnings calls that there are some reinsurers that are showing increased appetites based on the market conditions as they stand today going into the renewals, which is a bit of a change relative to what we’ve seen in prior years,” said the executive.

He acknowledged that at the other end of the spectrum, there are some companies still managing volatility.

“This is an environment in which you’re navigating those risk appetites – if you do that successfully that’s how you achieve the best outcome,” Van Slooten said.