What does the reinsurance market look like at the moment?
Currently there is a mismatch between property reinsurance supply and demand, and that’s really a result of the elevated losses from natural catastrophe activity that we’ve seen in the period since 2017 – the majority of which came from so-called secondary perils. US severe convective storm losses were at record levels in the first half of 2023 and our analysis of the industry’s financial results suggests that the bulk of those losses were retained by the primary insurers. That’s an important proof point for investors, because it demonstrates that the ‘reset’ achieved through the 2023 reinsurance renewals has been effective in driving more sustainable earnings for reinsurers. Atlantic hurricane season is another test obviously. The outcome will significantly influence renewals going forward, as we saw last year with Hurricane Ian.
What have been the other factors affecting the reinsurance renewals market in recent years?
Concerns around the impact of climate change and the outlook for inflation are top of the list for any investor currently considering participation in the reinsurance market, because these issues are creating uncertainty around future loss costs. Between 2020 and 2022, you could have added Covid-19 to the list. Investors look to reinsurers to address uncertainty through higher pricing, and that’s certainly been one of the drivers behind the renewal outcomes we’ve seen in 2023. If reinsurers want to retain investor support, they need to produce better results after years of under-performance.
Can you talk in more detail about the impact of inflation/interest rates?
Quantitative easing after the 2007-2008 financial crisis resulted in a long period of low inflation and low interest rates. That meant that investment returns were weak, reserves appeared redundant and capital was cheap. The situation now feels very different, and the change has been quick enough to stress the financial system, as we saw with the bank failures earlier in the year.
Inflation began to spike as we exited the pandemic and it was then exacerbated by the conflict in Ukraine. Central banks reacted by raising interest rates very quickly from historic lows. This caused significant reductions in the value of bonds and equities being held on re/insurance company balance sheets, which impacted their investment returns and reported capital positions in 2022.
During 2023, headline consumer price inflation has reduced in the major markets, although perhaps more slowly than had been forecast. There has been a modest recovery of asset values, which is boosting capital positions, and the benefit of higher interest rates is now being seen in improved ordinary investment income, so it does feel like we’ve turned a corner to some extent.
How do you see insurers/reinsurers dealing with reserving requirements over the next 12 months?
The industry is carrying a lot of reserving risk relating to the pandemic, recent major losses and the conflict in Ukraine, and it has had to contend with an inflationary spike at the same time. Of course here we’re talking about loss cost inflation, which only correlates to some extent with consumer price inflation. The drivers are factors such as the cost of labour, building materials and medical care and all are being constantly reassessed.
Lingering inflationary pressures continue to create doubt around the adequacy of the reserves that have been established historically, and that is one of the reasons why we’re currently seeing a lot of activity in the legacy market.
What do you think will be the key conversation points for delegates at Baden-Baden?
Last year it was inflation and that discussion will continue, particularly on the casualty side, where social inflation has re-emerged as a major industry topic. But given the relentless severe convective storm losses in the US in 2023, I think much of the focus will be on mitigating the impact of secondary perils, like flooding, hailstorms, wildfires and droughts. This type of loss is not very well modelled, which creates doubt around whether pricing is adequate.
How is Aon supporting its clients?
There is great value in having an insightful, data-driven advocate by your side in this type of environment, as it can drive better business decisions. It is our job to help clients navigate volatility, build operational resilience, and present their business case to reinsurers in the best possible light – explaining, for example, how they view the risk in their portfolios and how they are managing inflation. Communicating such bespoke characteristics is how insurers achieve differentiated outcomes, at a time when reinsurance capacity is somewhat constrained.
