Aon calls on reinsurers to lean into risk to support a sustainable market

Aon has said that the biggest risk faced by the (re)insurance industry is “diminished relevance” as it said that for reinsurers to provide real value – at a time when they are generating near-record earnings – they must play a more active role in helping insurers manage frequency losses and earnings volatility.

Rupert Moore, UK CEO of Reinsurance Solutions for Aon, said: “If reinsurers continue to run from risk, it will force insurers to follow suit and we will all become part of a shrinking and less relevant industry. Aon is here to bring clarity and confidence around risk; shaping better decisions and highlighting profitable growth opportunities for all parties.”

In its ‘Ultimate guide to the reinsurance renewal’, the firm said that while the (re)insurance industry faces challenges – including geopolitical and economic uncertainty – the biggest risk is diminished relevance.

“The industry can either lean into the opportunities created by a world of changing risk or retrench and watch as a greater proportion of risk is retained or shifts to the public sector and capital markets,” the report continued.

The intermediary forecasts an increase in pricing competition in 2025, with insurers beginning to see greater flexibility around capacity provision and coverages.

It also highlighted that global reinsurer capital is at a record high of $695bn at 30 June 2024 – up $25bn compared to year-end 2023.

It said the increase was principally driven by retained earnings, new inflows to the cat bond market, and recovering asset values – as well as improved investment yields.

Aon noted the impact of alternative capital increasing to $110bn on renewals in 2024, with reinsurance pricing gradually decreasing as reinsurers rewarded the best performing risks.

Property a “growth-oriented renewal”

In a more detailed look at what is expected to be an “analytical” renewal by line of business, Aon described property as a “growth-orientated renewal”.

It highlighted the fact that while cat losses were elevated again in H1 2024, changes in the structure of reinsurance programs last year meant the bulk of losses are being retained by insurers.

“As a result, reinsurers are making exceptional returns on property catastrophe portfolios by historical standards, while adding to the industry’s growing pool of capital. Expected returns for property catastrophe reinsurance remain above reinsurer ROEs as well suggesting room for rate reductions while still achieving strong performance over a market cycle,” the report continued.

“Coupled with strong participation from third party capital and insurance-linked securities investors, reinsurers’ capacity at January 1 will be more than ample to meet demand.”

Aon also noted strong demand for reinsurance as insurers look to grow in a market where underlying pricing remains robust in certain areas combined with exposure growth and more complex risks in all segments.

“Reinsurers that are willing to meet the broader needs of insurers will be best positioned to achieve their growth ambitions. Their behaviour will count at the January renewal, as insurers take a holistic approach to signings and reward solution-minded reinsurers,” the report suggested.

It added that the reinsurance industry is strongly capitalised and well positioned to absorb one or more major hurricane losses if the wind blows in the next two months.

“All things being equal, pricing competition is expected to broaden across the market at renewals in 2025, with meaningful risk-adjusted rate decreases for the best-performing risks and a better balance for the whole market,” said Aon.

It suggested opportunities in property abound for reinsurers, from supporting growth at insurers to frequency solutions and providing short-term capital relief.

Differentiation key in casualty

Despite continued concerns around casualty business – especially in the US amid rising loss costs and the impact of legal system abuse – Aon said it believes the stage is set for a stable renewal, where differentiation will be key.

The firm said that capacity for casualty business remains adequate to meet demand, but appetite for growth and requirements vary, linked to their respective positions during the 2015-2019 soft market years.

“While some reinsurers have pulled back from US casualty, others are looking to take advantage and grow, attracted by high interest rates and robust underlying pricing. Relationships with core trading partners remain as important as ever.

“However, the composition of reinsurance panels and dependence on a small number of reinsurers is becoming even more important with shifting reinsurer appetite. Building relationships with new markets ahead of renewals will be time well spent,” Aon added.

The reinsurance broker acknowledged concerns around loss development – especially in relation to large corporate and auto liability written in the soft market – as it says differentiation will be key at renewals.

It said that reinsurers will pay close attention to factors driving loss development and will use their own assumptions if insurers are not able to provide detailed information and demonstrate that lessons were learned and the right underwriting actions taken.

On nuclear verdicts, Aon said reinsurers want to understand key loss drivers in a portfolio and what actions an insurer is taking around pricing, limits, attachment points and claims processing to mitigate them.

“Reinsurers are particularly keen to understand the steps insurers are taking to address severity claims, such as triage to flag notifications that require special treatment,” it said.

The firm pointed to positive factors impacting renewals, including “robust” underlying rates as well as relatively interest rates that should make casualty an attractive line of business for many reinsurers.

It highlighted umbrella/excess liability rates increasing 12.3 percent in Q2, with further increases expected in Q3 and Q4.

General liability rates were up 3.2 percent in Q2 – accelerating from 0.8 percent in Q1 – while auto rates accelerated from 6.6 percent increases to 8.4 percent between the first and second quarter of the year.