(Re)insurers reassess portfolio mix amid renewed focus on volatility

(Re)insurers are increasingly re-examining their portfolio mix as they assess whether investors will reward decisions to retain the exposures which are creating earnings volatility through rising loss frequency, according to Andy Marcell, CEO of Aon’s Reinsurance Solutions.

Speaking to The Insurer TV, Marcell said companies were now increasingly questioning the extent to which investors were rewarding the decision to retain volatility, with the debate likely to continue through the upcoming renewal season.

“It is more complicated for those with both insurance and reinsurance operations, which may see an accordion effect of growing insurance over reinsurance,” he said. “We are helping a number of clients, both on the insurance and reinsurance side, think through their portfolio mix.”

He said a major challenge facing (re)insurers was assessing whether the frequency and severity experienced in the last five years would continue for the next five years.

“If so, how do I change my portfolio mix and manage my rate and my level of exposure and the returns I want for assuming that volatility?” he said.

“When clients think about that, they actually start thinking not so much about their reinsurance protections because I think the market has done a good job understanding how to position aggregate covers and understand the value of their cat exposure as it relates to cost of capital and frequency and how they manage return expectations.

“But a lot of what they’re thinking through now is actually the original product – for example the property policy – and the returns they’re getting for that.”

Marcell said the biggest reaction to the rise in losses from secondary perils will likely be how carriers rethink their original property policies, in terms of whether to shrink limits, drive up rates or change their mix of business.

For upcoming renewals, Marcell said the key message to clients was to be patient.

“There is no doubt there will be upward pressure on pricing, likely more so in EMEA than in the US on a relative basis.  

“And loss-impacted layers, particularly lower layers where there’s been more activity, will be under greater pressure, with aggregate under greater pressure compared with occurrence.

“But we were in a similar position last year with people talking up the market. I said at the time cooler heads will likely prevail and they did.”

Marcell also questioned the extent to which reinsurers have reduced their exposure to volatility from high frequency of cat losses by moving up towers.

“We didn’t see dramatic changes in retention – lower layers are always more expensive. In certain jurisdictions like Florida they’re under much more pressure than we’d ever experienced, but they still got done, albeit at higher rates.

“In the end, reinsurers get a lot of returns by writing through the towers. There are some companies that have big insurance portfolios that tend to move away from the frequency because they’re going to get that frequency from their insurance operations.

“But as a stated aim, in actuality reinsurers don’t need to. They match risk and capital and there is a lot of premium in the lower layers and that still helps balance out how they distribute their risk throughout the towers.”