There is no hiding from the fact that 2021 renewal discussions are going to be tough, and a lot is riding on how reinsurers respond to insurers presenting Covid-19 claims on their catastrophe reinsurance programmes, Andy Marcell, the CEO of Aon’s Reinsurance Solutions business, told The ReInsurer

A “much tougher” reinsurance renewal awaits in 2021 than was seen this year, but the extent to which insurers will face increased rates and tightened terms and conditions remains unclear at this stage.

Andrew Marcell – Aon

Covid-19, catastrophe losses, low interest rates and broad financial market flux are just some of the factors at play in the lead up to the renewal season, as Andy Marcell, the CEO of Aon’s Reinsurance Solutions business explained “it’s hard to isolate one single factor” behind the further anticipated hardening of the reinsurance market.

It is clear Covid-19 is having an effect, but with so much uncertainty surrounding the pandemic’s possible impact on the industry, “reinsurers are faced with a difficult time in quantifying what the downside will ultimately be to them”, said Marcell.

“The numbers are meaningful, and yes, people say it’s an earnings event, but there will be further development as the story unfolds because the loss is ongoing and there’s no particular end in sight.”

But Covid-19 is only one of myriad factors that will have a bearing on the 2021 reinsurance renewals, with the market already tightening before the pandemic hit.

“The backdrop to everything is that the environment for reinsurers was deteriorating,” said Marcell.

Reinsurers were already having to contend with the low interest rate environment, a situation which Marcell said was “predominantly in the US” but still has a significant impact on the global reinsurance market, and deteriorating casualty results as concerns mount over social inflation and prior years’ losses.

And those issues have come on the back of the reinsurance industry as a whole making little to no return in recent years because of natural catastrophe events, for example typhoons in Japan or hurricanes, tornadoes and wildfires in the US.

“The economic consequences of the pandemic on reinsurers’ balance sheets has also been significant,” said Marcell.

In order for reinsurers to adjust to this new trading environment and to position themselves to make sufficient returns, Marcell said reinsurers “are going to be driving changes to terms and conditions and rates.

“It will be a much tougher market than it was last year. We’ll see how it all plays out – it’s a more difficult environment and it’s difficult to quantify. But we will have a situation where reinsurers are seeking greater returns and charging more for their capital – that’s a given,” he said.

While there is this sense of an overarching tougher trading environment in the reinsurance industry, Marcell said the situation becomes nuanced when considering the differences between the property and casualty segments.

Even though there have been improvements in the broader primary property market’s pricing, Marcell said reinsurers will still be looking for yet more rate increases for peak zone cat exposure. “Reinsurers are going to push those rates to the extent they can,” he said.

It is a different situation in the casualty market, though. The primary casualty marketplace has imposed wide-scale price increases in response to the challenges it has faced in terms of increased volatility and severity.

“How reinsurers respond to [Covid-19 claims] will have longlasting impacts on the relationships between some of the major reinsurers and their

clients”

However, even though casualty is in many ways more challenged than property, Marcell said “reinsurers feel more positive about the condition of the original marketplace.”

Casualty quota share terms and conditions “will be under pressure” said Marcell, “but that won’t be the same as in the property cat space which will have more pressure.” “There will be more of a focus on rate than what is happening with the original terms on the property side,” he said.

Difficult negotiations While rates and terms and conditions will be a major talking point during negotiations, another issue will be how reinsurers respond to insurers presenting Covid-19 business interruption claims under their catastrophe reinsurance programmes, said Marcell.

“There is a wide range of outcomes because clients have written a wide range of policies,” he explained.

“There are cases where insurers have provided explicit coverage, some where it’s a grey area and still being questioned, and some where there is no coverage at all. Reinsurance treaties have ranged from being named perils to all-perils, they have hours clauses, and they have separate UNL definitions. Each treaty is different,” said Marcell.

“How reinsurers respond to that will have long-lasting impacts on the relationships between some of the major reinsurers and their clients,” he said.

Clients will feel that they are right to present Covid-19 claims to their catastrophe reinsurers where there’s following-fortunes language and all-peril policies, said Marcell. “They feel that the reinsurers should participate in the loss too.”

As a result, “it’s going to be very challenging for individual account executives on treaties to negotiate terms for 2021 with that shadow in the background,” said Marcell.

Pricing shifts come as demand rises The expected changes in pricing dynamics come as demand for coverage increases. As Marcell noted, many of Aon’s reinsurance clients are large national carriers, and they view the Covid-19 outbreak as their major catastrophe event for the year. In response, they sought to reduce their exposure to potential volatility later in the year, and in recent months have repositioned their reinsurances and bought additional coverage at the top of their programmes or reduced their attachment points. That continued drive to reduce volatility on their balance sheets in what remains a highly uncertain world has seen demand for a rise in reinsurance, said Marcell.

Even aside from the current economic downturn and the pandemic, insurers are grappling with the perceived impacts of climate change and that again increases demand for reinsurance.

“There are a lot of studies on how climate change will pan out and how it is impacting the frequency and severity of catastrophes, but there’s no exact answer to that question, and that causes concern and uncertainty,” the executive said.

The low interest rate environment is also driving demand for reinsurance. “Investment returns were already low, and now they’re even lower,” said Marcell. Consequently, insurers are focusing on underwriting returns and on limiting their overall expenses.

“Clients are pushing towards cost efficiency, but they’re also focussed on underwriting and portfolio management, and reinsurance plays an important part in that,” the Aon executive commented.

The drive to reduce volatility on balance sheets and the low interest rate environment are affecting demand for prospective reinsurance, said Marcell, but there is also growing interest in protection for business that has been written in the past.

“There is a need and desire from insurers to put the past behind them and to clean up balance sheets,” said Marcell, who explained that “demand for retrospective reinsurance was already rising, and it’s just continued to accelerate”. The CEOs of both regional and global reinsurance brokers all have “a multitude of deals on their desks” relating to prior years’ business that clients are looking to resolve.

Brokers can help create that demand by looking at clients’ balance sheets and advising them on how to be more capital efficient, Marcell said, but currently the major driver of these retroactive reinsurance deals are the insurers themselves which are looking to make their capital bases more efficient.

Insurers are working hard to improve their performances after seeing their bottom lines hit with catastrophe losses and low interest rates in recent years. As Marcell explained, after all that hard work, clients want to avoid prior year development from causing additional pain, and specialist reinsurance products can support that.