A game of two halves: nat cat losses could derail reinsurance bounce back: Aon

In a virtual event in place of the cancelled Monte Carlo Rendez-Vous, the broker offered its insights into the year so far and what to expect from the reinsurance renewal season. According to Mike Van Slooten, head of business intelligence at  Aon Reinsurance Solutions, there was good news and bad news.

“The good news is that reinsurers generally performed pretty well in the first half of 2021 and that capital has continued to build from what was already a pretty strong position,” he said. Based on the 22 companies in the broker’s reinsurance aggregate, the industry saw a combined ratio of 93.9 percent for the first half of 2021.

“Most reinsurers posted strong growth in gross written premiums in the first half of the year, mainly reflecting the impact of renewal rate increases as the year has progressed. Demand also held up well.”

Results

Past rate increases—the benefits of which were masked in 2020 by the pandemic—were now beginning to be apparent in reinsurers’ results as the impact of the virus waned.

“The impacts of COVID-19 on P&C business were much reduced in the first half,” said Van Slooten.

“Overall, when we look at the first half, it was a pretty strong performance.”

It’s not clear how long that will last.

“The bad news in the last couple of months is that nat cat loss activity has continued at a high level, and events early in the second half of the year are already threatening to derail full-year earnings,” Van Slooten said.

European floods in mid-July and Hurricane Ida at the end of August would conservatively cost the industry at least $30 billion, he added.

“Preliminary impact forecasting data suggests that we are already close to the 10-year annual average with four months of the year left to run,” he said.

“This means that, when you’re thinking ahead to renewals, there’s quite a lot of sensitivity around what happens in the remainder of the year.”

While the industry has seen strong capital flows, with global reinsurer capital up $10 billion to $660 billion and alternative assets under management growth having recorded four consecutive quarters of growth, there was likely to be caution from underwriters.

“Plentiful capacity and disciplined deployment sums up the situation,” he warned.

Climate changes climbing up the agenda

It’s not just short-term considerations that will play on reinsurers’ minds, according to the broker.

Even if the remainder of 2021 is benign, Van Slooten pointed out that it follows four years when the combined ratio averaged around 102 percent. Likewise, on overall earnings, the annualised return on equity base for its reinsurers in the first half was 13.4 percent, bolstered by investments performing well. But that follows an average of just under 5 percent in the previous four years.

“That’s a level of return that is some way below the cost of capital,” he said.

There are considerable challenges ahead. Introducing and hosting the event, Andy Marcell, chief executive officer of Aon Reinsurance Solutions, noted two.

The first was interest rates. “The low interest rate environment has forced everyone –reinsurers and insurers—to focus a lot of their efforts on underwriting profit, which is continuing to drive original rate change throughout the market,” Marcell said.

“The reality is that underwriting profit and the tools to reach those underwriting profit goals are front and centre in everyone’s thinking.”

The second challenge was climate change, with the German floods, Hurricane Ida and secondary perils such as California wildfires bringing the issue again to the forefront. Re/insurers were increasingly questioning whether they were being rewarded for the volatility they were taking on.

“That is causing people to shift their portfolios and maybe amplify insurance over reinsurance or casualty over property. We see a lot of debate happening around the industry,” Marcell said.

Those questions are likely to persist as the evidence of the impacts of climate change become more visible.

In his presentation, Steven Bowen, head of catastrophe insight, impact forecasting at Aon, reviewed the extreme events of the year, from the US polar vortex and freeze across the southern states at the start of the year and the severe weather season across the country, breaking the $10 billion loss barrier again; through to July flooding in Europe and the Henan province in China, causing the county’s costliest insurance event to date; and most recently Ida, back in the US.

“In terms of climate change, all this is closely aligned with what we would expect,” Bowen said.

“One thing we can definitely take from the past 20 to 25 years is that cat losses are going to continue to go up.”