Aon’s Monaghan: Communication and differentiation are key to successful renewal | New
- Reinsurers have moved away from low adhesion layers and aggregate blankets, especially in the US
- Global reinsurance capital down to $600 billion as of June 30
- Reinsurers are concerned about frequency and severity, quantification of secondary risks, rising inflation, impact of climate change and strength of the US dollar
- More non-benefit structures should be used to fill coverage caps
In an interview with The insurerMonaghan said there were challenges during the June and July renewals, “and those challenges will continue into 1.1.”
“It’s a very turbulent environment,” he said.
In a recent report on mid-year renewals, Aon pointed out that reinsurers have reduced their appetite for catastrophe exposure after several years of above-average catastrophic losses. Natural catastrophe protection capacity has contracted significantly for the first time since 2005, and some reinsurers would not underwrite certain risks at any cost, such as lower layers of reinsurance limit for catastrophe risk in Florida.
Monaghan highlighted factors that are worrying reinsurers, including frequency and severity trends over the past five years, difficulty in quantifying secondary perils, rising inflation, the impact of climate change and the strength of the American dollar.
“All of the factors that reduce reinsurers’ appetite for real estate risk, particularly for prime areas, are also contributing to increased buyer demand,” he said. “Everyone deals with the same drivers. This leads insurers to say that we need more protection. This prompts reinsurers to say that we need to sell less protection.
The market environment also means that very limited new capital is entering the space. Aon estimates that global reinsurer capital was $600 billion as of June 30, 2022, down $75 billion from the end of 2021. This decline was primarily driven by unrealized bond losses, related to rising interest rates.
In addition, the capital that has entered the market has been concentrated in areas reserved for cats.
“We’ve seen price increases, but we haven’t seen significant new capital entering the reinsurance business in 2022 or 2021,” Monaghan said. “All forms of capital, whether traditional, collateralized or securitized, face the same challenges. Now more than ever, you need to be connected to the widest range of capabilities. »
As such, the executive said communication is key in a market like this.
“Reinsurers want to see clear, thoughtful and concise evidence of how insurers are already tackling issues like inflation. I don’t think reinsurers want to double count or double the fees they charge, but in the absence of clear evidence of what the primary carrier is doing, reinsurers make blanket assumptions and add them to pricing,” said Monaghan.
He added: “It’s also the case that models, for example, third-party catastrophe models don’t have a uniform answer to this. Reinsurers therefore apply their own factors, and this varies from reinsurer to reinsurer, but it could be a double digit adjustment on exposure.
A stressed system
A concern in a market environment like the current one is that it creates pressure on the whole system, Monaghan said.
“It can sometimes get contradictory,” he said. “It’s counterproductive. Our job is to provide our clients with a solid execution strategy backed by solid analytics that allows capacity providers to make an appropriate price assessment so that we can complete the placement. It is important for everyone to think about the fact that the motors are universal and affect both sides.
“Reinsurers are struggling with retro capacity. Their investors want them to limit exposure for the same reason the major carriers’ investor base wants them to buy more protection for exposure on the nat cat side.
Monaghan said stress levels will rise as the market moves closer to 1.1.
“We engaged with customers earlier than usual to develop renewal strategies,” he said.
Even with that, Monaghan thinks it will be a tough renewal season. He added that Aon is using its global resources to identify and engage additional sources of capacity.
On the alternative capital side, Aon thinks it is possible to find investors who will support the company and find a vector for diversification.
“They have to be convinced that there is a return to be made,” he said. “We’ve had significant rate increases over the past few years, and going forward I think investors are trying to figure out if those are creating enough yield. Insurance assets remain an attractive source of diversification for many investors with whom we have engaged.
Monaghan added, “Lower tether layers and aggregate programs, particularly in the US, are areas where reinsurers have moved away from risk, and that’s being driven by losses in those layers. This is also the area where many of our customers need capacity. We will see many more no-compensation structures as we try to find innovative ways to close the gap.
“We are implementing strategies to secure our clients’ capacity before it is exhausted, as reinsurance continues to be one of the most accretive and valuable sources of capital for insurers.”