Aon’s Marcell predicts capital will flow back in and “stabilize” market in 2023

When the “dust clears” following what’s shaping up to be a chaotic 1.1 renewal, capital that is currently “sitting on the sidelines” will flow back into the market providing clients with more options in 2023, according to Aon’s Reinsurance Solutions CEO Andy Marcell.

Speaking exclusively to The Insurer TV on its Leading Voices programme, Marcell said he believed that clients – particularly in the NA property cat space – would look to buy more vertical limits, but not at the prices and the structures that are currently on the table.

“I think they'll wait and see if capitalism wins and money flows into the industry in 2023,” he said. “And I wouldn't be surprised if many of our clients buy additional cover during the year.”

For Marcell, it’s not so much a question of if but when this capital will flow in and it will come from multiple sources, including private equity, hedge funds and latterly, pension funds.

“I think the bigger question is why hasn't it come in so far,” Marcell said.

The run up to 1.1 has seen a limited number of successful fundraising initiatives with several pulled amid investor and industry caution.

London-listed Beazley is among the exceptions, successfully raising £350mn in equity last month, while White Mountains-owned Ark raised $300mn for a new 2023 property cat sidecar vehicle Outrigger Re.

Vantage Risk’s chief executive of reinsurance, ILS and innovation Chris McKeown, is also understood to be edging closer to raising between $500mn and $1bn of collateralized third-party capital which could still be in time to deploy at 1.1.

Investor confidence

While the industry’s failure to return its cost of capital to investors over the past five to six years – alongside trapped capital from large loss events – has diminished appetite from alternative capital, Marcell said investor confidence will likely be restored once rate adjustments and changes to retention levels have been implemented.

“I think they've lost confidence in the industry's ability to price risk,” said Marcell. “And I can understand that, but once they see what's happened, they will re-emerge and start putting money back into the industry.”

“What we're saying to clients is that 1.1 2023, when it's done, and you look in the rear-view mirror, this is not a KRW [Katrina, Rita, Wilma], where there was a big loss and capital was sucked out of the industry. [Post KRW] there was a dramatic increase in prices to bring people back to level, so that they can have feasible businesses in the future. And then more capital flowed into it, because it was just seen as a reaction to a big single loss.”

Marcell said the current dynamics have seen the valuation of reinsurance entities within investor portfolios trade at 20 percent discount to book value, prompting investors to re-allocate capital away from insurance.

This trend has been exacerbated by the macroeconomic conditions which have seen record inflation and rapid increases in interest rates.

“We're trying to be respectful and treat the reinsurers accordingly. But by the same token, we do see the market as quite fragile and vulnerable. And so we do need this capital to flow in, to stabilize it. And to be able to articulate the returns that it wants for the risk that it bears in a much more consistent way than has been done before,” he concluded.

The Insurer will be producing more coverage from Aon’s Andy Marcell’s exclusive interview this week, but you can watch the full interview for more of his views on: