ESG credentials to be requested in renewals discussions: Aon

Information detailing the environmental, social, and corporate governance (ESG) credentials of both cedants and reinsurers could be requested as part of these renewals negotiations for the first time, as both parties seek more detail on the underlying risk and their counterparties.

That is according to Mike Van Slooten, head of business intelligence for Aon’s Reinsurance Solutions division, speaking to Intelligent Insurer’s 1.1 Club ahead of this year’s Baden-Baden reinsurance conference.

He believes this renewal will be a complex negotiation anyway, as buyers and sellers grapple with so many pieces of what is an “increasingly complex jigsaw”. ESG considerations make matters even more complicated.

“ESG factors will be a topic for both sides and I anticipate some mutual disclosure around the ESG credentials of cedants and reinsurers,” Van Slooten said. “A lot of information is exchanged anyway through the renewal process—cedants provide detailed packs around their performance. This will be one more thing to disclose.”

He explained that reinsurers are under pressure from shareholders to review and get better visibility on the underlying risks, and that they are seeking leadership on this issue. Meanwhile insurers are under pressure from their home regulators to examine their own ESG goals and credentials—and this extends to the companies they do business with, including their reinsurers.

After the pandemic

In addition to ESG concerns, COVID-19 will still have a role to play. Some discussions around the final liabilities from business interruption claims are ongoing while many of the larger composite reinsurers will have exposure to COVID-19 through their life and mortality books of business.

Underpinning that, and at the heart of negotiations, is the actual performance of reinsurers. While most performed well in the first half of the year, Van Slooten stressed that a number of cat losses will have an impact of Q3 results—and the industry is only halfway through hurricane season.

“Reporting season for Q3 will offer a better picture of what has happened,” he said. “We have seen some big losses in Hurricane Ida and the European floods. Those Q3 cat loss estimates tie into the broader conversation around climate change and the greater frequency and intensity of losses as well as more secondary perils causing losses.”

In the first half of 2021, Van Slooten suggested, the reinsurance industry as a whole posted a combined ratio of around 95 percent and a return on equity of some 6.7 percent.

“We know that performance will not be repeated in the second half; if they even break even in the second half, their return on equity will be 6.7 percent, which is lower than the cost of capital. That is a problem for the industry,” he said.

Adding to the complexity of the picture is the new capital that has entered the market through a mixture of startups and established players. He estimates that some $25 billion of new capital has entered the industry in the past 18 months.

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“It is always difficult for new companies to come in when there is already lots of capacity and strong relationships that you need to break through, but it seems that they are managing to write reasonable volumes of business,” he explained.

“Whether that is enough to impact the broader shape of the market is not clear but a lot of buyers are interested. The capacity seems to be welcome.”

Alternative capital, meanwhile, is at record levels. Van Slooten notes that this sector has experienced something of a hiatus since the 2017/18 losses, which hit this sector hard.

“Some investors left, but the more sophisticated players remained, and new investors are again entering the sector on the expectations that rates are rising,” he said.

The final big issue permeating negotiations will be exclusions, Van Slooten said. COVID-19 has focused minds around this issue but the nature of wordings and scope of coverage is increasingly under the microscope as the industry looks to avoid such uncertainty happening again.

“We are seeing a lot of volatility and things such as systemic risk, climate change and cyber are all coming into focus,” he said.

“Reinsurers want to be insulated from uncertainty. No-one wants ever more restricted coverage but greater clarity of wordings is in everyone’s interests. There will be some difficult conversations around that but the devil is in the detail.”

Mike Van Slooten is head of business intelligence at Aon’s Reinsurance Solutions. He can be contacted at: mike.vanslooten@aon.com

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