Early planning and differentiation will help position clients at 1/1: Aon

Paul Anderson (pictured), executive managing director and US Property Segment leader at Aon, said a number of market factors were behind mid-year renewal challenges, including the pullback of reinsurer capacity, which began in late 2021, but accelerated in the first half of 2022.

While loss and loss development over the past five years led some reinsurers to adjust their property cat portfolios, the impact of inflation has resulted in an imbalance between additional demand and a decline in traditional market supply.

Heading into January renewal season, inflation continues to be a significant topic of discussion in the market, but clients are now more prepared for the discussion. Cedants that can clearly articulate, through both discussion and data, how they have managed inflationary exposures will be able to position themselves more favourably this renewal.

Aon is helping each of its clients work through this process in anticipation of APCIA meetings, Anderson said.

It is also important to note that while results from the past few years have presented challenges, the loss ratio for the US property market over a longer period when on-levelled to today’s rates looks favourable and has attractive returns for investors. With the recent increase in property reinsurance rates, a quiet 2023 should have a positive impact on additional capacity being allocated to the space, especially in insurance-linked securities (ILS).

In recent weeks, we have heard from a few markets who are beginning to see the upcoming renewal season as an opportunity to expand their portfolio. As a result, cedants and reinsurers will be keeping a close eye on Hurricane Ian and any other potential weather events over the balance of the season. The market environment also means very limited new capital is coming into the space.

Aon estimates that global reinsurer capital totalled $600 billion at June 30, 2022, down $75 billion from the end of 2021. The drop was driven principally by unrealised losses on bonds, linked to rising interest rates.

Key message for 1/1

Anderson said his key message for clients ahead of 1/1 was centred on preparation, adding that Aon has been working with its clients over the past several months to prepare for a successful January renewal.

“Being able to clearly articulate how carriers are actively managing their portfolios from an exposure management perspective as well as staying on top of the challenges of inflation will be a critical message and focus of discussion with reinsurers,” he said.

“Strong relationships with key trading partners can be advantageous for cedants and reinsurers. While important in every market cycle, it’s increasingly important in a more challenging market.”

Anderson highlighted the importance of discussions around alternative coverage considerations, such as the incorporation of a catastrophe bond, industry loss warranty (ILW), or parametric cover, beginning well in advance of January 1 to promote a “smoother” overall renewal process.

Combining capital

Anderson said that Aon Reinsurance Solutions aimed to approach the market as “an agnostic capital advisor”, not advocating for one style to the exclusion of others on the source of capital, as long as it represents the most appropriate solution for the client.

In so doing, while more time is taken to assess some of the non-traditional forms of capacity, it has proved to be a very effective strategy for those committed to exploring a range of capital options.

To emphasise his point, Anderson said that Aon was able to support one particular client looking for additional capacity at mid-year renewals with a unique solution, which ultimately led to better business decisions.

“Aon’s knowledge of those markets’ appetites, with a potential expansion of historical appetites, enabled the broker to put together a full slate of coverage that maximised capacity while balancing cost.”, he said.