A shift in the market

Aon’s Tracy Hatlestad outlines the main topics of discussion for property reinsurance ahead of the APCIA Annual Meeting.

Which topics will be driving conversations at the APCIA meeting in 2023?

This year we expect discussions in the property reinsurance space to focus on several specific topics. First and foremost, we expect a more orderly renewal at 1 January compared to the previous 1.1 renewal, barring any significant ceded events over the next few weeks. Insurers will be aiming to balance consistency in coverage with collaborative relationships that endured the 2023 renewals periods. We believe that broader contract consistency is important for everyone in the market because it adds less friction and more value to the industry overall.

Secondly, we expect many discussions will center around frequency and/or secondary perils. The restructuring of the occurrence product through increased retentions shifted coverage to the tail, and you can observe this in the results of insurers, which have retained more catastrophe loss net in 2023 – especially for secondary perils. With pricing today at a level that supports stronger returns for reinsurers, the ability to offer additional frequency protection is going to be a topic for many insurers. It’s important to note that this doesn’t mean it’s a reinstatement of aggregate exactly as we saw in the past; there’s a number of products that can provide the type of coverage insurers are looking for as they adjust to a different landscape of retained net exposure and these can bridge some of the gap between supply and demand.

Last year the discussion was all about capacity, how has that evolved this year?

We’ve seen a shift in the market since this time last year. Additional reinsurance supply started to return globally later in the first quarter, evidenced by top-up purchases by insurers. In the US, where insurers place around half the limit in the region in Q2, we saw reinsurers authorizing additional capacity during the June and July renewals. As is often the case in market cycles, that initial additional supply was based on a flight to more name brands, a dynamic that was seen during recent renewals.

While we haven’t seen new reinsurers forming, additional capacity is entering the space through existing players. In addition, the breadth of supply has widened beyond the early growth play reinsurers to a broader market, bringing additional capacity. Overall, pricing and portfolio returns continue to be aligned to investors’ expectations and demands.

As we look to 1.1.2024, we expect mid-single digit demand increases globally for traditional property catastrophe reinsurance, as many insurers that typically renew in January were able to secure additional limit throughout the year, which will serve to offset some of the demand we might have seen year over year. This outcome is also partially driven by the increased capacity provided through the ILS market, where catastrophe bond issuances have reached new highs in 2023.

That said, individual markets and cedant demands will still vary, as some have seen more heightened loss activity in 2023 than in prior years.

How important are relationships given the current market dynamics?

We think strengthening and rebuilding relationships will be a key factor at the 1.1 renewal, especially for reinsurers seeking growth. For those reinsurers, it comes through aligning priorities to insurers’ coverage requirements and being transparent about pricing and capacity throughout the renewal. With the amount of data now collected on quotes and authorizations, insurers can better understand the strategies of individual markets, and can discern collaborative patterns through the data. Our sector hasn’t had this level of robust data in prior harder market periods.

From the insurers’ perspective, they should be focusing on providing quality data to reinsurers, in order that reinsurers can properly evaluate the risk they are taking. Insurers that achieve this will have considered areas such as inflation and insurance to value, the demonstration of superior claims handling, and a strong custom view of their portfolio risk – including non-natural catastrophe exposures like strikes, riots and civil commotion.

The volume of buyers and sellers has increased, and as the renewal evolves, we expect this will be displayed in the range of unique capacity solutions that become available, both on an individual and portfolio level basis.

Tracy Hatlestad is executive managing director and global property segment leader at Aon