Data as a differentiator

Aon’s Reinsurance Solutions business is helping clients to use data as effectively as possible to highlight differentiation from their peers during the upcoming reinsurance renewals, president Tim Ronda told The ReInsurer…

Where is the greatest demand for reinsurance coming from among US clients?

One of the interesting things about the environment that we’re in right now is both our insurance and reinsurance clients recognise how attractive reinsurance capital is. But depending on the type of company you are, the reinsurance demand changes.

Generally, the frequency of nat cat activity around the world – whether it be wildfires, typhoons, smaller hurricanes, or property losses coming out of Covid-19 – has led companies to rethink what their appropriate cat retention is, and what their appropriate cat limit is.

Across the US, companies are looking at their retained annual cat loss and their cat PMLs. Some think they have the right strategy and will move forward with that, but some also think that in 2020 and 2021 maybe having a little less retained cat volatility would be a good thing. We saw demand increase at the June and July renewals, and we’re expecting more companies will buy down their cat retentions in 2021.

But each individual company has its own bespoke, individual story. One company could look to buy more reinsurance, and another company with a large capital base in a line of business making a profit may look to buy less reinsurance.

So you expect there will be even greater differentiation between clients?

There are some market cycles where there is an average result for a product line, and each company seems to be around that average. But in today’s market, there’s a larger dispersion around the average than we’ve seen in other cycles.

Some insurers feel their results are materially better than average, and they’re looking to be differentiated by their reinsurance partners. Alternatively, there will be some companies whose results are worse than others, and there will be some response to that as well.

Writers of casualty and professional lines quota share treaties are benefitting from the improving underlying business, but are there concerns these are still not keeping pace with loss costs?

We spend a lot of time with our clients on their data, and there’ll be some scenarios where the rate in the original market is outpacing original loss trends. But each individual scenario is different, and needs to be considered differently. 

For some products and insurance companies, when we look at their portfolios, we think original loss ratios are decreasing as a result of rate outpacing trend. Certainly there are some products that are a little bit more latent in nature where we’re still trying to determine what that loss trend is and whether the rate increases are commensurate with it.

Where are the biggest gaps between what clients want, and what reinsurers can provide?

We think that reinsurers and reinsurance capital have responded really well to the different challenges they have been presented with, and I don’t think that there are many significant gaps. 

When there is a lack of data though, sometimes reinsurers are a bit reluctant to respond to insurers’ needs, which we understand. We saw it with the wildfire losses, terrorism after 9/11 and now the pandemic.

That’s why Aon is so dedicated to data and making sure that we’re bringing as much of our expertise to the market as we can so that companies can understand the risk and feel more comfortable putting a price on it. 

One of the gaps that came out of Covid-19 was there’s probably more to the business interruption element of property policies than anyone had ever thought of before. We want to work with reinsurers to come up with solutions so they feel they have comfort and know what they’re doing, and they’re using enough data to price it to the return levels they want. 

Right now, it’s getting enough data for some of these new challenges to get reinsurers comfortable to write material reinsurance participations for material reinsurance contracts that helps support clients.

How do you expect the recent hurricane activity will impact property cat pricing for US clients going forward?

It’s still early days for Hurricane Laura, and much still needs to be determined, but it does not appear that despite fairly material wind speeds, the associated damage will be a very meaningful loss to insurers. It’s a large economic loss, and a very sad event for the people of Louisiana, but it does not seem it’s going to be that meaningful of an event for reinsurers.

But when we consider future activity, if there’s a medium to large-sized storm that could trap collateral for some reinsurance contacts, that could impact their ability to finance additional risk in 2021. From our perspective, we don’t expect Laura will have a meaningful impact on what is already going on in the market. However, if there is a medium to large-size storm, it could have a further impact.

How has the industry responded to the threat posed by wildfire, and do you think more needs to be done?

At Aon, we have five of the largest wildfire cat placements, and we’re very proud that even in a challenging reinsurance market in 2020 we were able to secure the amount of capacity that our clients needed and we worked with our reinsurance partners to do that.

“We’re working on several confidential projects with key reinsurers for products that we could sell to an original insured, or to an insurance company, to address this [pandemic] exposure.”

We’re dedicated to getting enough data and modelling so that our clients can understand their risk, and the reinsurers can understand the risk that we’re asking them to take. In 2017 and 2018, we saw the two highest wildfire loss-making years, and Aon is using various modelling initiatives to understand the dynamics that led to those wildfires.

There has been lots of talk about various pandemic (re)insurance programmes in recent months, but what do you think any potential solution needs to offer?

To the extent that the market can understand the circumstances that bring loss, and then estimate the amount of loss that arises from pandemics, there’s an ability for the insurance industry to finance some of this risk. But some pandemic scenarios are so large that it’s more than insurers and reinsurers are willing to take on, and there will likely have to be some partnership with government entities to deal with those events.

It’s a very complicated issue, but Aon wants to work with our insurance and reinsurance partners who have expertise in many areas to try and come up with a product for the original insureds that insurance companies feel comfortable with.

We’re still in the development of that because when you look at some of the economic scenarios that could arise from a pandemic where the US closes down for six months, it exceeds the amount of capital that’s in the insurance business. We think there are pandemic scenarios that the insurance industry can solve, and there are those pandemic scenarios that are so large that federal governments will likely need to be involved to help with the tail risk.

But there are certainly solutions that individual insureds as well as insurance companies will seek from the private insurance and reinsurance market that we think, with time, appropriate products can be designed to address.

What is Aon’s Reinsurance Solutions team doing to support clients address pandemic exposure?

We’re working on several confidential projects with key reinsurers for products that we could sell to an original insured, or to an insurance company, to address this exposure.

We’re trying to be creative with where we can help provide risk transfer for, and solve for it in a way that allows the insurance or reinsurance company know what it’s aggregate limit is outstanding for that scenario and control it.

Knowing the size and length of the tail is key. The insurance world is built on understanding frequency and severity. For insurers and reinsurers to feel like they’re getting an appropriate price for the exposure, they have to feel like they have an understanding of the severity. Until there’s more time spent understanding the frequency and severity of pandemics, these products will be slow to launch.