Aon’s Reinsurance Solutions leaders detail keys to success in APAC renewals

With the eyes of the global re/insurance industry focused on Asia, as the SIRC 2022 conference gets underway, Aon’s Reinsurance Solutions segment leaders for Asia-Pacific discuss the biggest challenges in seven critical lines of business, and how clients can navigate volatility to secure the result they want.

Pierre Vende: accident & health

The accident & health (A&H) re/insurance markets have been impacted by the COVID-19 pandemic, and while the fundamentals of these lines remain unchanged, the challenges for A&H re/insurers are broader and more acute today compared to the pre-COVID-19 years.

In some areas, A&H insurers may first need to adapt their product offering around travel insurance and specific diseases coverage, as well as adjusting distribution and operations to embrace greater digitisation, to be able to rebuild or further develop their portfolio and premium income.

Reinsurers’ expectations have increased with regard to the appropriateness of re/insured benefits. They are also scrutinising contract wording more carefully as they look to expel any coverage ambiguities.

Challenges caused by inadequate COVID-19 private insurance covers in several markets in the region have persuaded many market participants to adopt or maintain a prudent stance going forward.

In the private medical insurance space, an additional area of uncertainty is the overall evolution of claims costs. This is in both reported frequency and treatment costs. Frequency focuses on the possible “catch-up phenomenon” post relaxation of COVID-19 restrictions, while uncertainty around treatment costs refers to a healthcare industry that has recorded substantially higher than average inflation.

With many international reinsurers looking to develop A&H business across different sub-product lines and countries, the opportunity for insurers lies in developing reinsurance partnerships centred on product innovation and risk management, and by demonstrating the value that can be created in this fast-growing segment.

Soeren Soltysiak: property

The reinsurance market globally has been affected by significant catastrophe activity in recent years, which has led carriers, rating agencies and capital providers to question the long-term viability of property reinsurance.

Lingering effects from COVID-19 and the ongoing conflict in Ukraine are putting continuous pressure on supply chains and creating an inflationary environment that hasn’t been seen in many countries for decades.

It is a shame that many companies have taken a broad-brush approach and reduced their capacity commitment to catastrophe-exposed business across the board rather than engage with all stakeholders.

A well-diversified, balanced portfolio cannot be achieved with a one-size-fits-all view.

We operate in a market where more than 60 percent of economic losses are uninsured globally—more than 90 percent in most developing countries. We need companies that “step up to the plate” rather than turn away from those that need it most. This requires effort from all parties: the original insureds, insurance companies, reinsurers, brokers and governments, and the long-term benefits for the private and public sector would be game-changing.

As far as the upcoming renewals are concerned, differentiation and data-driven execution will be key. The two main topics raised in nearly every renewal discussion currently are climate change and inflation.

We need to clearly distinguish climate change versus climate variability. No-one disagrees that the risk-landscape is changing, but the impact needs to be carefully analysed and quantified, and is unique to every market.

Inflation has created significant pressure on communities around the world, but its impact needs to be assessed on a domestic level. In the context of Asia, the two largest economies, China and Japan, are still seeing inflation in the low single digits.

Shailendra Sapra: agriculture

Agriculture insurance has been a growing class of business in the Asia-Pacific region for the past 15 years. Food security is a challenge that many governments are increasingly facing in the region, and we expect the demand for disaster risk financing through insurance to increase in the coming years.

Agriculture insurance is a diversifying class of business for many of our reinsurance partners, so the reinsurance capacity available is sustainable and long-term.

Primary rates are expected to move for many of our markets, and being able to technically articulate the story of these movements is a key challenge that our clients will face during the renewal.

Proportional treaties are the main avenue through which many of our clients protect their balance sheets, and there are some pockets of market tightening. Reinsurance capacity on non-proportional treaties is abundant. We believe the key is to have a structured approach to the renewals, which includes starting engagement with reinsurers early and exploring the alternative risk transfer solutions of Aon’s agriculture team, which are supported by advanced agriculture analytics.

Ai Ping Chan: marine

In the past few years no major market event has heavily impacted the marine market. The pandemic had reduced marine activity, therefore the marine market loss ratio has been stable. However, with trade picking up, the ongoing Russia/Ukraine conflict and inflation, there are a few key challenges for this renewal.

Reinsurers would like to price for: increased possibility for losses with increasing activity; increasing cost of marine claims for physical damage due to higher labour costs and the cost of raw materials; and increasing exposures and accumulation for cargoes as cargo values increase.

There may be future impact from aviation loss on specialty capacity if losses from the aircraft retained by the Russian government materialise under aviation war cover. In this changing market landscape, the keys to success are to show reinsurers that clients are managing cost, they are aware of accumulation exposures if any, and that they are maintaining prudent underwriting guidelines.

Marine reinsurance capacity remains stable; there is still a lot of capacity for excess of loss treaties, and some reinsurers pulling back from property-catastrophe exposures will look to expand in marine. This is an opportunity for marine clients.

Grant Hollyman: casualty

The casualty line of business has in the main been very profitable for reinsurers in the region over recent years. It has proved to be a more efficient use of capital compared with property classes, where a number of significant catastrophes have made favourable results a challenge for reinsurers.

However, achieving reasonable reinsurance rates on casualty classes remains a challenge for our insurer clients, due to increasing concern among reinsurers around their own overall results, inflation, and the long tail nature of the product.

We have been very successful in maintaining reasonable rates in a hardening market where we have been able to demonstrate that our clients are aware of these challenges and are addressing them effectively at the source. Key to this has been to show reinsurers that rate increases are being achieved in the primary business, and how those increases will flow through to the reinsurance market.

Tom Drake: retrocession

The global retro market has been hardening over the past 24 months due to a sustained run of high severity losses over the past five years or so, notably arising from secondary perils such as the European floods, California wildfires, Australian and Malaysian floods, not to mention typhoons in Korea and Japan.

Recently, Hurricane Ian swept across the Florida panhandle and is slated to become one of the largest insured events in recent history.

These events will undoubtedly lead to challenges around the level of retro as reinsurers come under pressure from loss frequency and the shifting view of risk as a result of climate change, exposure change and inflation. Price will also be affected, as there is more pressure to increase rates after allowing for increased modelled expected losses due to inflation and view of risk.

For coverage, pressure will be on unmodelled perils, meaning coverage will reduce to account for non-natural perils and broad slip form. And finally, capacity will grow on some accounts and reduce on others.

The key to success will be around engaging markets as early as possible; embracing simplicity, as this will outperform complexity; differentiation; and relationships, and remembering to keep calm and carry on!

Geoffrey Lambrou: facultative

The facultative reinsurance market continues to provide very meaningful capital and solutions for a significant portion of our clients in this region. However, the market conditions remain very diverse depending on the product areas involved, and the loss experience.

Consideration is needed for ongoing changes in commercial or legal environments. We see the impact of war changing inflationary and sociopolitical environments. Then, we have the significant implications of climate change. This all impacts facultative risk transfer, alongside the impacts of the pandemic.

At Aon, we firmly believe that we must continually improve and help our clients in a more complex world that in turn requires even more from our industry.

Challenge and opportunity exists in providing sustainable solutions which differentiate a specific client risk profile, while keeping pace with client risk protection needs, using facultative capabilities. Changing market conditions are ever present, but this shouldn’t prohibit delivering real value solutions to help our clients make better decisions over time. To do this as effectively as possible requires time and attention for underwriting detail, coupled with a negotiation process that provides strong communication with aligned objectives between valued partners.