Aon 1
Contents
Executive Summary: Differentiation Yielding Results in a Challenging Market 2
Global Reinsurer Capital: Strong Results Drawing Investor Interest; Catastrophe Bonds a
Hot Spot 6
Traditional Capital: Willingness to Deploy is the Constraint .................................................... 6
Reinsurer Results for the First Nine Months of 2023 .............................................................. 7
Alternative Capital: Best Performance in 20+ Year History .................................................. 13
Rating Agencies: Insurers Shift Focus to Best’s Capital Adequacy Ratio 16
US Insurers Impacted from Multiple Fronts ............................................................................ 16
Demand-Supply Dynamics: By Line of Business and Segment 18
Property: Competition Heats Up for Peak Perils .................................................................... 18
Global Insurers: Renewed Focus on Reinsurer Behavior ....................................................... 21
US Regional Insurers: Weathering the Storm ......................................................................... 22
US Facultative: Managing Volatility and Facilitating Growth ................................................ 25
Casualty: Reinsurance Supply Offsets Loss Trends .............................................................. 26
Specialty: By Line of Business ............................................................................................... 29
Agriculture: More orderly renewal ...................................................................................... 29
Aviation: A push for packaged deals .................................................................................. 30
Cyber: Pioneering innovation with first cyber cat bond ..................................................... 31
Marine, Energy, Political Violence and Terrorism (PVT) and Renewables: War coverage
complicates renewal ........................................................................................................... 34
Trade Credit, Structured Credit and Political Risk, and Surety: Growth continues amid
economic and political uncertainty ..................................................................................... 35
US Mortgage: A return to normalcy? .................................................................................. 36
About the Report
Aon’s Reinsurance Market Dynamics report provides a comprehensive assessment of the key
market trends observed during the January 2024 renewals period. Commentary on global reinsurer
capital, alternative capital and rating agency perspectives on the macroeconomic environment offer
insights on the potential direction of the global re/insurance industry and future renewals.
Aon 2
Executive Summary: Differentiation Yielding Results
in a Challenging Market
The January 1, 2024 treaty renewal proceeded relatively smoothly, as a rebound in profitability,
rebuilding capital positions and greater availability of retrocession capacity encouraged many reinsurers
to display increased appetites at the enhanced terms established in 2023. Higher primary insurance
pricing provided support in most areas, offset by continued uncertainty around the impact of climate
change, inflation, litigation funding and geopolitical risk on ultimate loss costs. These unknowns are
keeping potential new investors on the side-lines, despite the expectation that most reinsurers will easily
cover their cost of capital in 2023.
For many cedents, it was a challenging year. Capital buffers had already been eroded by unrealized
investment losses going into 2023 and many were carrying less reinsurance coverage principally in the
form of higher retentions forced by reinsurers in 2023. As it turned out, insured losses from natural
catastrophe events were again at elevated levels relative to historic averages, driven mainly by an
unprecedented impact from severe convective storm activity in the US and Italy, windstorm Ciaran in
France, flood losses in New Zealand, flood and wildfire losses in Greece, a major earthquake in Turkey
and Hurricane Otis in Mexico. There was also adverse loss development from the 2022 hailstorms in
France. These loss events were partially retained by insurers which further eroded capital, introduced
more volatility into underwriting results and resulted in increased rating agency scrutiny for many
insurers which has driven some increased demand for reinsurance protection going into 2024.
These dynamics generated ample opportunity for Aon’s treaty, facultative, investment banking, capital
advisory and analytics teams to work closely to support insurers at 1/1, helping to differentiate their
portfolios, navigate reinsurers’ differing risk appetites and explore all options from both traditional and
alternative markets. This approach is viewed as critical to achieving optimal outcomes in the current
environment.
Broadly speaking, reinsurers were actively trying to achieve their desired signings at 1/1 given the level
of returns at current pricing, terms and conditions. This was especially true for the mid and upper
catastrophe layers for peak perils. But even beyond the property catastrophe segment, reinsurance
pricing was flat to modestly up on a risk adjusted basis across most lines of business. Reinsurers were
eager to improve their relationships with cedents and many strategically targeted key clients with whom
to grow as they sought to secure broader diversification of their global reinsurance portfolio. This was
not the experience for programs, segments and regions that ceded significant losses to the market in
2023 and from whom reinsurers demanded significant price increases for 2024.
Property Treaty: Growing Supply Meets Increased Demand
Demand for property coverage remained robust at the January 2024 renewals. Catastrophe limit
purchased globally was up by low to mid-single digits year-on-year, with inflation still a contributory
factor. Insurers recognize the opportunity to purchase additional capacity at the top of their programs
but are generally constrained by the reality of budgets and current pricing levels. Earnings protection is
highly prized in the current environment but remains difficult to secure on cost-effective terms.
Aon 3
Generally, insurers looked to reward reinsurers that were most supportive during the challenging
2023 renewals but also took into consideration those reinsurers that exhibited constructive behavior
during the quoting process, responded in a timely manner and provided broad support across programs.
In a marked change from a year ago, most reinsurers entered the renewals with ambitions to grow in
property catastrophe reinsurance and the market was therefore more consistent in its approach to
pricing and terms. Appetite for peak perils and upper layers was generally strong, with a vibrant
catastrophe bond market providing further competitive tension in certain markets. Some reinsurers were
also more flexible in more challenging areas, such as peril-specific lower layers and aggregate covers,
particularly where insurers were able to offer potentially profitable participations elsewhere.
Pricing pressure on upper layers was generally downward in the US, but upward in the EMEA region,
areas with ceded loss activity in 2023, notably Italy, Greece and Turkey. Thanks to the increase supply,
European Insurers were able to align the pricing on their panel and limit the differences in conditions
from the previous year. Deductibles were generally stable, having undergone significant adjustments a
year ago, but loss-affected regional insurers and European markets saw further increases. Discussions
around other terms and conditions were more consistent and constructive across programs than a year
ago, when reinsurers sought to narrow coverage for natural catastrophes. In Europe, the capacity for
strikes, riots and civil commotion (SRCC) was available but with further territorial restrictions for the
aggregation of losses. Some insurers were able to expand coverage again at the January 2024
renewals, while others were able to achieve broader consistency in wordings across their full
reinsurer panel.
Property per risk renewals remain challenging due to loss activity, but structural changes, including
increased retentions, are expected to attract more reinsurers to support the segment going forward,
following the withdrawal of some markets in recent years.
Casualty Treaty: Favorable Outcomes Despite Varied
Reinsurer Risk Appetites
Some reinsurers adopted a tougher stance ahead of the January 2024 casualty treaty renewals, against
a backdrop of prior-year reserve deterioration and concern for adverse litigation trends. Others
recognized the earnings potential of improving primary casualty pricing and higher interest rates.
Appetites therefore varied, but ultimately capacity was ample. The main concern outside of the US was
international general liability policies containing US exposures. Discussions were otherwise focused
firmly on risk-adjusted rate and insurer differentiation. Generally, programs were completed in line with,
or better, than expectations.
General casualty excess of loss business renewed, on average, at mid-single digit risk-adjusted rate
increases. There were no significant changes to program structure or conditions. Retentions were
stable, although recent positive underwriting results gave casualty insurers options and room to push for
concessions from reinsurers. With adequate capacity available, quota shares were flat to slightly down.
Insurers who experienced outsized adverse development saw more significant reductions in
commissions, but they rarely outpaced the increase in projected loss ratios.
For professional lines, quota share commissions were scrutinized, with a general downward trend being
the outcome, dependent largely on prior-year loss emergence and rate change miss. Excess of loss
treaties needed to be risk-adjusted rate change positive; the range varied from very-low single digit to
high single digit increases. Loss-affected accounts were dealt with on a bespoke basis.
Interest and deal activity in the alternative reinsurance and legacy space remains strong.
Aon 4
We provide additional detail on the property and casualty segments as well as the alternative, facultative
and specialty markets in this report.
Regional Insurers: Similar Challenges across Regions
While last year was challenging for many insurers, US regional carriers bore the brunt of record severe
convective storm losses throughout meaningful portions of their portfolios. Between 1990 and 2022,
severe convective storm losses increased at an annual rate of 8.9 percent, according to Aon’s analysis.
In the first half of 2023 alone, US severe convective storms caused $38 billion of insured loss, breaking
the record of $33 billion set in the first half of 2011.
US regional insurers are currently navigating the most challenging segment of the reinsurance market.
Following a difficult 2023 renewal for property reinsurance, renewals for regional insurers at this 1/1
were more settled, with discussions focused on finding a market clearing price rather than capacity at
any price. However, renewal outcomes still varied greatly, reflecting a range of individual insurer
performance, financial stability, reliance upon reinsurance and an ability to quantify the impact of
ongoing and evolving underwriting actions. The working layers which are often purchased in the form of
multi-line excess of loss programs were challenging negotiations that required thoughtful balance in
achieving support across a client’s entire reinsurance program. Reinsurers continued to use the current
market conditions to revisit their portfolio construction and carrier partners. All else being equal,
regional insurers with the ability to clearly demonstrate a business plan that is addressing current loss
trends, improving policy terms and conditions and rate adequacy, generated the most capacity and
competition amongst their reinsurance panels.
Regional insurers in EMEA and Canada faced similar challenges to US regional carriers. Loss experience
varied greatly by country with many carriers also struggling to absorb increased reinsurance costs and
higher catastrophe retentions.
Navigating the Future
During 2023, Aon’s teams including our Strategy and Technology Group, worked with many clients to
identify and implement improvements necessary to create sustained profitability. This included rate
adequacy analyses, catastrophe pricing optimization using our CatScore™, portfolio optimization
studies, rating agency engagement, and strategic realignment studies. While clients have always sought
advice on these subjects from our broker teams, there was an increased demand throughout 2023 for
these capabilities as many clients struggled to navigate much higher retained loss post 1/1/2023
renewals. The impact of the hard work our clients achieved in 2023 will create a stronger foundation for
profitability across the industry in 2024.
Clients that demonstrate with credible data the important steps they took to improve profitability should
be rewarded by more favorable reinsurance pricing and terms going forward. Reinsurers must also work
to differentiate clients and adjust their assumptions around frequency and severity for those insurers
that have made the investments to achieve improvements across their portfolios.
In September, Aon published a list of key considerations for a successful renewal, upon which we have
expanded following the January 2024 renewal:
1. Consider alternative capital for optimal placement results.
2. Access facultative facilities for capacity when risks are removed from treaty programs.
Aon 5
3. Leverage strategic consulting and data analytics to refine risk appetite, adjust investment and
underwriting strategies, or review business lines, as well as differentiate your portfolio at renewals.
4. Explore structured reinsurance covers and legacy reinsurance solutions to manage volatility and
free up capital for growth opportunities.
5. Articulate clearly how you underwrite for inflation and its impacts on your risk profile.
6. Develop a custom view of risk to de-risk and reduce exposure concentrations, as well as to improve
understanding of secondary perils and emerging risks.
7. Understand your true cost of capital, including volatility of returns, which is critical to optimizing the
long-term return on capital.
8. Partner with a true client advocate that can provide advice and analytics to ensure your portfolio is
best positioned across capital providers to achieve your capital optimization goals.
Positive Outlook
The January 2024 property reinsurance renewal sets the stage for an interesting year ahead.
Demand for property catastrophe reinsurance remains strong at the start of 2024, supported by inflation
and exposure trends. As capacity continues to build, there will be opportunities for insurers to buy
additional limit at the top of programs, and for reinsurers to work with brokers and clients to share the
burden of secondary perils more equitably.
The increases in retentions a year ago have mitigated reinsurer losses and contributed to their positive
returns in 2023. But this has come at the expense of increased retained losses for insurers many of
whom are struggling to achieve the improvements in primary pricing and underwriting which are often
slowed by regulatory approval process quickly enough given their limited sources of capital to sustain
increased catastrophes.
We must work collectively to create the solutions necessary to sustain re/insurance symbiosis.
Joe Monaghan
Global Growth Leader
Reinsurance Solutions, Aon
Portfolio
Differentiation
Custom View
of Risk
True Cost
of Capital
Alternative
Structures and
Advocacy
Legacy
Reinsurance
Solutions
Aon 6
Global Reinsurer Capital: Strong Results Drawing
Investor Interest; Catastrophe Bonds a Hot Spot
By: Mike Van Slooten, Head of Business Intelligence
Richard Pennay, CEO of Insurance-Linked Securities
Aon estimates that global reinsurer capital rose by $45 billion to $635 billion over the nine months to
September 30, 2023. The increase was principally driven by retained earnings, recovering asset values
and new inflows to the catastrophe bond market.
Exhibit 1: Global Reinsurer Capital (USD Billions)
Sources: Company financial statements / Aon’s Reinsurance Solutions / Aon Securities Inc.
Traditional Capital: Willingness to Deploy is the Constraint
Aon estimates that shareholders’ equity reported by global reinsurers rose by $35 billion to $532 billion
over the nine months to September 30, 2023. The sector is viewed as well capitalized relative to the risk
currently being assumed, as confirmed by strong regulatory and rating agency capital adequacy ratios.
However, much more capital will be required if current unmet needs are to be addressed over time.
Traditional reinsurers generally performed well in the first nine months of 2023, despite a continuing
frequency of medium-sized natural catastrophe events, suggesting that the recent reset in property
pricing, retentions and other terms and conditions has created a path to more sustainable earnings.
A modest amount of new capital has entered the market, but new start-ups remain absent, reflecting
continuing investor concerns around the impact of climate change, inflation and heightened geopolitical
risk on ultimate loss costs.
511
493
514
516
488
530
556
574
497
532
64
72
81
89
97
95
94
96
93
103
575
565
595
605
585
625
650
670
590
635
0
100
200
300
400
500
600
700
800
FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 9M 2023
Traditional capital Alternative capital Global reinsurer capital
Aon 7
Reinsurer Results for the First Nine Months of 2023
Introduction of IFRS 17
Analysis of the global reinsurance sector has been complicated by the implementation of IFRS 17 in
some areas of the world from January 1, 2023. The new regime diverges significantly from U.S. GAAP,
meaning, for example, that it is now more difficult to directly compare the operating performance of
European reinsurers with their counterparts based in the United States and Bermuda.
Premiums/insurance revenues
Exhibit 2 shows the reported growth/contraction of the property and casualty (P&C) insurance and
reinsurance business written by selected companies in the first nine months of 2023. The average
movement was an increase of 8 percent, driven by pricing and exposure, particularly in the property
segment. Selective underwriting approaches resulted in some companies reporting reduced volumes.
Exhibit 2: 9M 2023 Changes in Total P&C Gross Premiums Written / Gross Insurance Revenues
Source: Company financial statements
Specific growth/contraction of P&C reinsurance portfolios, where disclosed, is shown in Exhibit 3. The
average movement was an increase of around 8 percent, with a wide spread of results reflecting the
variation in risk appetites across the market. A shift in business mix from proportional to non-
proportional covers was a headwind to premium/revenue volumes in many cases.
Exhibit 3: 9M 2023 Changes in P&C Reinsurance Gross Premiums Written / Gross Insurance Revenues
Notes: *Change in P&C reinsurance net premiums written
Source: Company financial statements
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
-40%
-20%
0%
20%
40%
60%
Aon 8
The chart below shows reported changes in total P&C net premiums earned / net insurance revenue in
the first nine months of 2023. The average movement was an increase of around 10 percent, providing
strong support to reported underwriting results.
Exhibit 4: 9M 2023 Changes in Total P&C Net Premiums Earned / Net Insurance Revenue
Source: Company financial statements
P&C underwriting results
Insured losses from natural catastrophe events were again above long-term averages in the first nine
months of 2023, driven by relentless severe convective storm activity in the U.S. However, most
reinsurers still posted strong underwriting results, driven by the recent shift in pricing and coverage and
the relatively low level of peak peril losses.
The average net combined ratio across the companies shown in Exhibit 5 stands at 92.0 percent, down
from 99.7 percent in the first nine months of 2022 (affected by Hurricane Ian).
Exhibit 5: 9M 2023 Net Combined Ratios
Source: Company financial statements
-20%
-10%
0%
10%
20%
30%
60%
70%
80%
90%
100%
110%
120%
130%
140%
9M 2023 Discount effect 9M 2022
Aon 9
Disclosed major losses from natural catastrophes and man-made events, net of reinsurance and
reinstatement premiums, are converted to combined ratio points in Exhibit 6, noting that reporting
thresholds vary across the industry. The average major loss ratio across the companies shown is 5.6
percent, down from 12.2 percent in the prior year period (impacted by Hurricane Ian).
Exhibit 6: Net Major Loss Ratios
Source: Company financial statements
Disclosed movements in prior year reserves are converted to combined ratio points in Exhibit 7. Most
companies continue to report overall redundancies, despite a growing headwind from U.S. general
liability reserves for the 2015-2019 period. In many cases, the momentum is slowing, reflecting caution
around the future direction of loss cost trends.
Exhibit 7: Prior Year Reserve Development
Source: Company financial statements
P&C reinsurance net combined ratios in the first nine months of 2023, where disclosed, are captured in
Exhibit 8. The average outcome across the companies shown is 89.0 percent, an improvement from
100.4 percent in the prior year period (impacted by Hurricane Ian).
0%
5%
10%
15%
20%
25%
30%
35%
40%
-8%
-6%
-4%
-2%
0%
2%
4%
9M 2023 9M 2022
Aon 10
Exhibit 8: P&C Reinsurance Net Combined Ratios
Source: Company financial statements
Exhibit 9 shows the net major loss ratios reported specifically in respect of P&C reinsurance portfolios in
the first nine months of 2023. The average outcome was 5.2 percent, down from 19.6 percent in the
prior year period (impacted by Hurricane Ian and the conflict in Ukraine).
Exhibit 9: P&C Reinsurance Net Major Loss Ratios
Source: Company financial statements
Investment returns
Investment results are benefiting from higher interest rates and resilient stock markets. The ordinary
yields achieved in the first nine months of 2023 are up by around 1 percent on average, relative to the
prior year. The yield on new investments now exceeds 5 percent, suggesting further upside in 2024.
60%
80%
100%
120%
140%
160%
9M 2023 9M 2022
0%
10%
20%
30%
40%
50%
60%
9M 2023 9M 2022
Aon 11
Exhibit 10: Ordinary Investment Income Net Yields
Source: Company financial statements
Return on equity
Strong underwriting results and improving investment yields combined to deliver robust earnings for
most reinsurers in the first nine months of 2023. The average annualized return on common equity
across the companies shown in Exhibit 11 was around 16 percent, albeit on a diminished capital base,
following the significant reductions in equity seen in 2022.
Exhibit 11: 9M 2023 Annualized Return on Common Equity
Note: * Pre-tax
Source: Company financial statements
0%
1%
2%
3%
4%
5%
6%
9M 2023 9M 2022
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
9M 2023 9M 2022
Aon 12
Capital
Significant unrealized losses on bonds continue to weigh on reported equity positions, but strong
earnings and recovering asset values have supported a partial recovery in 2023. On average, total
equity across the companies shown in Exhibit 12 rose by around 9 percent in the first nine months,
with RenRe and Everest leading the way, following issuances of new equity in the second quarter.
Exhibit 12: 9M 2023 Changes in Total Equity
Source: Company financial statements
Outlook
Most reinsurers will perform well in 2023, building capital among the incumbents and potentially
encouraging investors to back new company formations in 2024. However, a rapid shift in industry
dynamics is not expected, given the ongoing uncertainty around the impact of climate change and
inflation on future loss costs.
-10%
0%
10%
20%
30%
40%
50%
Aon 13
Alternative Capital:
Best Performance in 20+ Year History
Insurers and reinsurers leveraged alternative capital in 2023 more than any year in the history of
re/insurance market. In 2023, alternative capital crossed the $100 billion threshold for the first time,
representing an increase of over 7 percent from the year prior. As property reinsurance pricing
exceeded levels not seen in several years, insurers and reinsurers were grateful for the opportunity to
diversify their purchase with insurance-linked securities. ILS investors benefited from the highest risk-
adjusted margins in over a decade, offering well-priced capacity to cedents during a year in which the
North Atlantic hurricane season resulted in muted losses, further enhancing returns. Elevated risk-
adjusted margins along with strong collateral returns has provided for one of the best performing years
in the market’s twenty plus year history.
Exhibit 13: Alternative Capital Deployment (Limit in $ billions)
Source: SEC form ADVs, asset manager marketing materials and websites, company quarterly reports, Artemis and
Trading Risk / Aon Securities, LLC
0
20
40
60
80
100
120
Cat Bonds Sidecars ILW Collateralized Reinsurance and Other
Aon 14
Much of the growth has been directed to the catastrophe bond market. In 2023, the catastrophe bond
market grew by over $7 billion, a 21 percent increase the outstanding issuance amount in 2022. The
current outstanding catastrophe bond market at year-end 2023 stands at over $42 billion, an all-time
high. 2023 broke the record for the largest-ever level of catastrophe bond issuance, at $15.4 billion.
The market serviced 30 issuing insurers and 14 issuing reinsurers, with a combined amount of $10.1
billion. Government entities were also very well supported with $4.8 billion issued. Of note, the
California Earthquake Authority issued $1.505 billion of catastrophe bonds, a record amount for any
issuing entity over a calendar year period since the market’s inception. And 2023 was also a year during
which several entities came to market for the first time—11 new sponsors in total, and several others
returning to the market for the first time in many years, like for example, Chubb and The Hartford.
The fourth quarter was a significant part of this growth with $5.2 billion of total issuance volume. This
exceeds the second largest fourth quarter (2021) by $2.4 billion.
Exhibit 14: Total Outstanding Catastrophe Bond Issuance ($ millions)
Source: Aon Securities, LLC
Catastrophe bond pricing tightened throughout the course of 2023. By June, for example, industry loss
index catastrophe bond pricing tightened by up to 40 percent. Pricing however stabilized during the
fourth quarter, due largely to an overwhelming supply of new transactions brought to market coinciding
with some ILS investors handing back capital to their allocators as they looked to rebalance their
profitable 2023-year allocation to ILS. Those pursuing capacity in the catastrophe bond market were
rewarded with meaningful capacity at terms that proved beneficial relative to traditional reinsurance,
with many issuing companies’ primary objective being a diversified source of multi-year capacity.
$42,207 in Total Outstanding Limit
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
2015 2016 2017 2018 2019 2020 2021 2022 2023
Total Outstanding
Total Issued
Q1 Q2 Q3 Q4 Outstanding
Aon 15
The fourth quarter was significant in terms of peak peril issuances both on an industry index and
indemnity basis. The market welcomed a number of new sponsors to market, such as Selective
Insurance and Beazley; The Hartford, back to market for the first time since 2011, successfully issued
their first-ever indemnity-triggered catastrophe bond. Notably, all these transactions included material
commercial exposure, which was ultimately welcomed by investors.
The market also saw more diversifying transactions come to market in Q4 than we had seen throughout
the previous three quarters. Nearly, £600 million of European paper came to market including a
transaction for Versicherungskammer Bayern Versicherungsanstalt des oeffentlichen Rechts’ (“VKB”),
the market’s first domestic German insurance company. The take-up of European transactions
illustrates how European insurers are seeking out additional reinsurance capacity in the wake of a
tighter reinsurance market. Overall spread levels for European risk are at wider levels than seen
previously, in part reflecting uncertainty with respect to secondary perils.
The most significant catastrophe bond market development during the fourth quarter has been the
pioneering of cyber catastrophe bonds. AXIS placed the market’s first-ever 144a cyber catastrophe
bond, an occurrence indemnity-triggered transaction, giving coverage to AXIS for losses from “systemic
cyber events” over the span of a two-year risk period. Both Beazley and Chubb followed close behind
with Chubb achieving the largest size ($150 million) for this new class of risk. In total, over $400 million
of cyber notional has been placed with catastrophe bond investors. ILS investors are now leading the
way in further developing a catastrophe market for cyber. Aon is optimistic this market will continue to
develop and provide insurers with much needed capacity to further enable the growth of the cyber
insurance market. Simultaneously, the emergence of this new class of risk creates an opportunity for
catastrophe bond investors to diversify their portfolios which are currently concentrated in natural
catastrophe risk.
Finally, sidecar investors have been handsomely rewarded for their commitment to the product in 2023.
Given strong underlying reinsurance margins and the absence of major global natural catastrophes in
2023, sidecar investors have in some cases achieved returns of more than 30 percent. Renewals have
therefore been relatively straight forward as investors have been willing to commit to another year of
similarly well margined underlying reinsurance business.
Aon 16
Rating Agencies: Insurers Shift Focus to Best’s
Capital Adequacy Ratio
Pat Matthews, Head of Americas Capital Advisory
On November 15, 2023, after two years and two request for comments (RFCs) issued, S&P released its
new insurance capital model criteria. S&P also published a list of 63 insurers that are Under Criteria
Observation (UCO), which means they could be impacted by the new criteria. The new capital model
represents a dramatic change versus the prior model. While the rating changes are minimal, the impact
on an insurer’s approach to capital management is likely to be more significant. Aon’s view is that the
new model points toward improved capital adequacy. However, there are some business segments that
are impacted differently, either in a positive or negative way. The recent upgrade announcement by S&P
raising its financial strength ratings on the Society of Lloyd’s from ‘A+’ to ‘AA-´ is one example
supporting a stable outlook and robust underwriting discipline. We also believe many insurers will look
beyond S&P as the capital model regime that drives their ultimate capital decisions.
Two reasons support this view:
1. Best’s capital adequacy ratio (BCAR) model might replace S&P’s new insurance capital model as the
most constraining rating agency capital standard for insurers.
2. The impact from the qualitative aspects of S&P’s general insurance criteria is expected to increase
which makes managing to the new S&P capital model via cost/benefit analysis challenging (at least
for the next year or two).
US Insurers Impacted from Multiple Fronts
Entering 2023, insurers were already facing pressure from the financial market volatility that
characterized the marketplace in 2022. Unrealized investment losses eroded the capital cushion—
relative to rating agency, regulatory and economic capital requirements—that many in the industry had
previously enjoyed. Rating agencies have generally taken the view that the strong liquidity resources of
most insurers meant that insurers would be able to hold depressed assets to maturity, and positively
adjusted available capital estimates accordingly. However, with increased reinsurance costs and market
capacity constraints at the beginning of the year, many insurers were exposed to a larger share of the
severe convective storm losses that have occurred in 2023. These losses further eroded capital and
introduced increased volatility into underwriting results.
Rating agencies are increasingly scrutinizing insurer performance, which has faced a series of
headwinds in 2023. A turbulent renewal season at the start of the year led many insurers to increase
their retentions. With insured losses during the first half of 2023 as the fourth highest on record
(only
behind 2011, 2022 and 2021, respectively), rating agencies have taken rating action, with downgrades
so far significantly outpacing upgrades. Most often insurers have experienced negative rating pressure
in their operating performance assessment, although for some insurers the volatility has also resulted in
a weaker view of capital adequacy.
Aon 17
The P&C industry’s capital strength has been a bedrock of ratings stability over a significant number of
years, and for most companies it remains solid despite recent challenges to profitability. However, some
companies’ capital positions have been eroded due to underwriting losses, among other factors, leading
to negative rating actions. The effects of capital and operating performance deterioration will continue
to pressure some insurers, making it crucial for them to push for rate adequacy, improve risk
management practices and diversify their sources of capital.
As of mid-December, 220 rating units (representing roughly 40 percent of US P&C ratings) had their AM
Best ratings updated since August 2023, with 75 percent of those companies experiencing a decline in
their BCAR score. Over this time, the median BCAR score is down eight points year-over-year and we
expect it to continue to trend down as more company ratings are reviewed over the coming months.
Exhibit 15: BCAR Score Changes for 220 Rating Units
Source: Aon’s analysis of AM Best data
With ratings under increased scrutiny, demand for reinsurance protection increased in the latter half of
2023. Meanwhile, with an increasing frequency of ‘secondary’ peril events coupled with elevated
catastrophe retentions and weakened (but still strong) balance sheets, we expect insurers will seek to
diversify their capital sources to include innovative reinsurance solutions and debt or surplus notes to
manage capital needs. For some companies, the focus will be to maintain minimum capital adequacy
standards while other companies will use this additional capital to lean into the market and grow in a
strong rate environment. Either way, 2024 will provide an opportunity for creative reinsurers and lenders
to differentiate themselves.
<-20,
15%
-20 to -
10, 19%
-10 to -5,
17%
-5 to 0,
24%
0 to +5,
16%
>+5, 9%
Aon 18
Demand-Supply Dynamics:
By Line of Business and Segment
By: Tracy Hatlestad, Head of Global Property
Dave Nicholson, Head of Global Clients; Pat Abbe, Head of US Regional Clients
Andrew Laing, Head of Global Facultative
Nigel Light, Head of Global Casualty, and Amanda Lyons, Head of US Casualty
Tom Murray and Richard Wheeler, co-CEOs of Global Specialty
Property: Competition Heats Up for Peak Perils
In a marked change on a year ago, the supply of property catastrophe reinsurance capacity at the
January 1 renewal was more than adequate to meet demand, resulting in a competitive environment for
peak perils and upper layers. Towards the end of the renewal season, discussions focused on reinsurer
signing activity as supply increase outstripped demand year on year. Expected returns remain a key
hurdle for reinsurers as underwriting remained front and center for renewals, but capacity was available
where return thresholds were met.
With ample capacity, the upper layers of property catastrophe programs experienced downwards
pressure on pricing at the January 1 renewal. EMEA treaties saw mild upward price pressure except in
areas with ceded losses from natural catastrophes in 2023.
This year’s January renewal proceeded in a timely manner, with most reinsurers taking a more
constructive and open approach. Differentiation in insurer and reinsurer behavior mattered at the
January 2024 renewal. Insurers that did not have loss experience in 2023 and/or those that were able
to articulate positive changes to underwriting portfolios achieved the best possible outcome. At the
same time, reinsurers that were timely and constructive in quoting, authorized broadly on a program,
and were regarded as valued partners over the past 12 months were rewarded by insurers at 1/1.
Following the resetting of the property market and much improved results in 2023, many reinsurers are
now keen to grow. As a result, some reinsurers were more accommodating at the renewal when it came
to meeting the needs of individual insurers in more challenging areas, such peril specific lower layers
and aggregate covers, as well as reinstating certain terms and conditions.
While a more stable reinsurance market is to be welcomed, 2023 was tough for many insurers,
especially smaller regional players and mutuals that bore the brunt of record severe convective storm
losses and other secondary perils. The increases in deductible levels a year ago have helped mitigate
reinsurer losses, and reinforced necessary changes in the insurance value chain that should ultimately
result in a much healthier and more sustainable market. In the meantime, reinsurers that want to grow in
the segment should look to support insurers with flexibility in lower layers, aggregate covers and
structured solutions.
Aon 19
Topic
Commentary
Inflation
contributed to
property cat
demand
Demand for reinsurance remained robust at the January 2024 renewal, with
property catastrophe limit purchased globally up low to mid-single digits year-
on-year. Albeit to a lesser extent as rates fall back in major markets, inflation
continues to contribute to a rise in demand for property catastrophe limit.
Insurers recognize the opportunity to purchase more limit at the top of their
programs but are generally constrained by the reality of budgets and current
pricing levels.
Capacity ample for
peak US perils
Capacity for property catastrophe reinsurance was readily available at the
January 1 renewal, especially for peak perils and upper layers, although the
market was more nuanced for regional insurers in the US and Europe. Record
issuance and attractive pricing in the catastrophe bond market has provided
additional competitive pressure for peak perils, while reinsurers were generally
more willing to deploy capacity and increase line sizes on structures that
maintained adequate retentions. Several traditional reinsurers raised capital in
2023 to capitalize on improved market conditions.
Retro supply edges
upwards
Retro property specialty renewals proceeded smoothly with market leaders
being engaged early and providing quotes in a timely manner. Available supply
across all retro segments is generally up, with a particular focus on excess of
loss products, from both rated and non-rated markets looking to consolidate
positions with key clients and capture market share early in the renewal period.
Since demand is generally stable, clients have been focused on achieving the
broadest possible coverage with more syndication across all placements.
Overall, pricing was within target levels, and renewals through 2024 will benefit
from the behavior of retro markets through 1/1 renewals.
Reinsurer growth
appetite returns
Most reinsurers entered the renewal with ambitions to grow in property
catastrophe reinsurance, in particular for peak perils and upper layers. Insurers
were able to utilize participation on upper layers and profitable specialty
portfolios to garner reinsurer support for lower layers and aggregate covers.
Reinsurers that were most supportive during the challenging 2023 renewal
were rewarded by insurers at the 2024 renewal.
Retentions
generally stable
Deductible levels were generally stable, having undergone significant
adjustments for property catastrophe covers last year. However, regional
insurers and European markets with loss activity had further retention
increases this year. As reinsurers evaluate top line positions and signings post-
January 1, we anticipate supply will push to support some needed capacity at
lower retentions.
More flexibility on
T&Cs
With the return of a more competitive environment, the reinsurance market was
more consistent in its approach to pricing and terms. Discussions around terms
and conditions were more constructive than a year ago. At January 2024, some
insurers expanded coverage while others achieved broader consistency in
wordings with their full reinsurer panel.
Aon 20
Topic
Commentary
Appetite for E&S
quota share
Reinsurers appetite for catastrophe-exposed quota share business in the US
excess and surplus lines market increased at the January renewal, reflecting
the improved rate environment in this market, which is subject to fewer
constraints in pricing and policy form. Increased appetite was driven by the
expansion from current quota share markets and new reinsurers entering the
space given current market dynamics.
Per Risk
While recent treaty years are still green, results indicate improving profitability
for reinsurers in this line at a portfolio level. Terms have tightened over last
three years, with pressure on price, retentions, cat coverage and reinstatement
provisions. Average retentions have increased over last five years, with many
larger carriers dropping first layers. Structural changes, improved pricing, and
improved terms and conditions on the underlying business should bring
additional reinsurers to support this product segment going forward.
Aggregate covers
back on the table
The January renewals presented an opportunity for some insurers to revisit
property catastrophe aggregate covers, which were largely unavailable a year
ago due to reinsurer concern for frequency losses. According to Aon’s Impact
Forecasting team, insured losses in 2023 again exceeded $100 billion, with
severe convective storms accounting for almost two-thirds of the annual total.
Following the resetting of the market in 2023, some reinsurers were more
willing to consider aggregate reinsurance deals at the right price and terms
during the 2024 renewal.
European
secondary perils in
focus
Broadly, pricing in the EMEA region saw mild upward pressure, although
adjustments were particularly sought by reinsurers in markets impacted by
recent catastrophe loss activity, notably Italy, Greece, Norway, Slovenia and
Turkey. Storms and flooding in Italy this year generated insured losses of nearly
$4.76 billion
1
, the costliest natural catastrophe-related insured losses ever in
Italy. The devastating earthquake in Turkey and Syria in February, which led to
insured losses of almost $6 billion, triggered discussions on the distribution of
excess loss cover versus quota share reinsurance for quake cover in
Southern Europe.
1
Aon’s Impact Forecasting analysis
Aon 21
Global Insurers: Renewed Focus on Reinsurer Behavior
January 1 is a significant renewal for global insurers, with many of the largest European and US-based
entities renewing at 1/1. Following a challenging 2023, global insurers have renewed their focus on
trading relationships, reinforcing the value placed on consistent reinsurer communication and the
breadth of trading relationships.
Topic Commentary
Attractive partners
Reinsurers displayed an appetite to grow with global insurers at the January 1
renewal by taking a proactive position and communicating their appetite early.
This segment purchased a variety of treaties across multiple classes of
business, offering reinsurers the opportunity to access a diversified pool of
exposure and significant premium volume. The increased catastrophe
retentions pushed in 2023 meant many global insurers retained significant
losses which might have otherwise been ceded to reinsurers during an active
cat year. As a result, global carriers sought to hold the line on further retention
increases and reestablish concurrent terms and conditions. As original
insurance market rates continue to increase, most insurers were willing to
reduce pro rata cessions rather than agree meaningful reductions in ceding
commissions.
Focusing on the
value of
reinsurance
Reinsurers were willing to enter discussions around the value of the
reinsurance partnership and how appropriate levels of frequency protection
can be reintroduced. At January 1, global insurers strived to improve frequency
coverage and reinsurers met those needs where they felt to attachment points
and coverage were at an appropriate levels. Global insurers purchased or
renewed bespoke frequency covers for property exposure, typically through a
collaborative structuring process with targeted counterparties. Reinsurers
remained committed to responsible retention levels as they sought to avoid
unsustainable frequency losses and encourage appropriate discipline on
original risk pricing.
Constructive
dialogue on
coverage
Reinsurers engaged positively with global insurers around coverage terms and
conditions, including named perils and important aspects of coverage like
strikes riots and civil commotion and terrorism. While reinsurers were more
flexible at January renewals, price remained a key feature of the discussions as
the market sought a balance between the value of the cover to the client and
reinsurer return expectations.
Leveraging
profitable portfolios
Global insurers were able to push terms to reflect their overall performance and
differentiation from their competitors. By taking a holistic view of their
reinsurance purchasing and trading balances across segments, insurers were
able to leverage more profitable lines of business to gain support on more
challenging reinsurance cessions.
Aon 22
US Regional Insurers: Weathering the Storm
US regional insurers navigated the most challenging segment of the reinsurance market. Following a
difficult 2023 renewal for property reinsurance, renewals for regional insurers at this 1/1 were more
settled, with discussions focused on finding a market clearing price rather than capacity at any price.
However, renewal outcomes still varied greatly, reflecting a range of individual insurer performance,
financial stability, reliance upon reinsurance and ability to quantify the impact of on-going and evolving
underwriting actions. Reinsurers continued to use the current market conditions to revisit their portfolio
construction and carrier partners. All else being equal, regional insurers with the ability to clearly
demonstrate a business plan that is addressing current loss trends, improving policy terms and
conditions and rate adequacy generated the most capacity and competition amongst their reinsurance
panels.
Topic
Commentary
Challenging timing
and the impact of
record catastrophe
activity
Regional and mutual insurers face a unique combination of challenges. Last
year saw a record number of $1 billion losses
2
in the US, mostly from severe
convective storms, which accounted for almost two-thirds of all global insured
losses from natural catastrophes. Faced with significantly higher net retentions
in 2023, this aberration in storm losses impacted large segments of the country
at a time when many regional insurers were still navigating the impacts of the
macro-economic environment and how to adequately respond to changes in
their reinsurance programs. With portfolios that are generally more
concentrated, regional insurers have turned to rigorous underwriting actions to
restore stability to their portfolios including adjustments to rates, deductibles,
and primary terms and conditions. With significant action underway, especially
in personal lines, the inherent lag in these underwriting initiatives earning
through portfolios means the heightened frequency of severe weather in 2023
impacted many regional insurers at a very vulnerable time. Some regional
insurers are implementing new business moratoriums or exiting certain
segments altogether to hinder the market volatility impact on their exposure
profiles and results.
Underwriting
performance
The dramatic push for higher reinsurance retention levels implemented
throughout 2023 renewals resulted in improved returns for reinsurers. This
change has created a significant divide in the overall results of many US
regional insurers and their reinsurance partners. With the reinsurance market
producing returns that exceed the cost of capital, the US property and casualty
industry produced its worst six-month underwriting performance in H1 2023 in
more than a decade. Almost 20 percent of US regional insurers reported double
digit reductions in policyholder surplus through the first three quarters of 2023.
For some, the financial strain has proved too high, with several long-standing
US regional insurers being forced to take more drastic measures to re-establish
capital positions or seek mergers/affiliations to continue serving policyholders.
2
Aon’s Impact Forecasting analysis
Aon 23
Reinsurer support
Reinsurers continue to use current market unrest as an opportunity to reshape
their portfolios, which has specifically impacted smaller mutual insurers in
2023. Some states are altering insurance laws to give these smaller insurers
more flexibility when it comes to reinsurance products and solutions. While this
stands to offer slight relief, many of the impacted insurers are now facing major
reinsurance program changes while underwriting actions work their way
through to results. That timing delay is partially driven by state rate filing
requirements limiting insurers’ ability to quickly adapt their products and
portfolios. In the meantime, it is incumbent on the reinsurance market to
support these smaller regional insurers, a foundational part of the US insurance
market, as they adjust to the new market reality. Having implemented recent,
favorable underwriting actions, some regional insurers have already presented
a more attractive proposition to reinsurers at January 1, 2024, forming new
reinsurance partnerships through that effective differentiation. With the long-
term evolution in portfolios, and changes in reinsurance structure and pricing,
the US regional segment will provide reinsurers with a more attractive place to
deploy capital with insurers that will value the relationship.
Alternative
solutions
As many US regional insurers continue their journey back to financial stability
and more sustainable profitability, a growing number are exploring alternative
reinsurance options to manage volatility in challenged, lower catastrophe
layers or to address financial leverage concerns. Aon witnessed an uptick in
inquiries and transactions for alternative solutions including structured quota
share arrangements, legacy reinsurance transactions and non-traditional,
multi-limit multi-year catastrophe covers. To address these emerging concerns,
we completed a number of new treaties for regional insurers that proved a good
solution in managing capital as they navigate current market environments.
Product innovation and a broader education of the market on these solutions
remains a core investment that Aon continues to make on behalf of our clients.
Working program
headwinds
Beyond property catastrophe reinsurance, US regional insurers also face a
difficult market for working programs as reinsurers react to property loss
trends, the continued (but tempering) impact of inflation and concerning
litigation trends. These multi-line, excess per-risk and casualty excess of loss
placements are as important to US regional insurers as their property cat
placements, enabling them to compete with similar policy limits and product
offerings to their larger competitors. Aon has been working with US regional
insurers throughout the past several years to garner material support from a
smaller pool of reinsurers participating in the working program market. Going
forward, these programs will offer reinsurers a compelling opportunity to build
out underwriting teams and business plans that will offer stable, consistent
returns on business that is generally less volatile than other parts of reinsurers’
portfolio. The exposure profile of US regional insurer working programs will see
meaningful, positive impacts of the ongoing underwriting and pricing initiatives
over the coming year.
Aon 24
Optimistic outlook
As the US regional insurer segment looks to the future, there are reasons for a
relative level of optimism. Broadly speaking, local markets are accepting the
necessary rating and terms changes necessary for insurers to re-establish the
needed balance in their risk and capital frameworks. Regional insurers facing
capital challenges have numerous solutions available to support their position
as they find ways to manage their portfolios for long term stability. For those
with greater financial resources, allowing time for their ongoing underwriting
actions to earn through their portfolios will remain a primary area of focus over
the coming quarters. As that footing is being re-established, these insurers will
look for diversifying growth in markets positioned to generate adequate returns
now and into the future.
Aon 25
US Facultative: Managing volatility and facilitating growth
2023 was a strong year for the US facultative reinsurance market, with increased demand and activity.
Insurers are making increased use of facultative solutions to support their growth ambitions and to
mitigate the impact of changes in the treaty reinsurance market. While demand is currently elevated,
capacity in the facultative market remains stable.
Topic Commentary
Valued tool to
manage volatility
Over the past 12 months, facultative reinsurance has become a highly valued
tool to manage frequency and severity volatility. Insurers’ higher net retentions
are driving strong demand for facultative reinsurance to protect attrition and
natural catastrophe risk. We are seeing higher demand for secondary perils
including tornado, hail and non-named wind. Facultative solutions continue to
be beneficial in providing coverage that is excluded in treaty programs and/or
within net retentions. Overall, facultative reinsurance is an integral part of an
insurer’s portfolio management including cat aggregations and portfolio
performance.
Supporting primary
growth
Insurers’ growth ambitions are driving increased demand for facultative
reinsurance as a tool to offer more capacity and increased line sizes. However,
with more carrier competition in the insurance market, pricing pressure is likely
to increase for facultative reinsurers. If insurers are under pressure to grow,
facultative reinsurers will need to provide more competitively priced solutions
to support this growth and fronted opportunities.
Facilitating higher
casualty limits
Interest in facultative covers continues to grow in the casualty market with an
increase in requests for higher primary limit support. Insurers, captives and risk
retention groups are approaching the facultative market for alternative
solutions for challenges in the casualty market. For example, facultative
reinsurance is being used to write larger primary limits where excess insurers
attach higher than the typical limit of $1 million or $2 million. It can also provide
solutions in areas like auto liability, where re/insurers have pulled back from
writing in certain states due to concern for adverse litigation trends and nuclear
verdicts.
Consistent demand
increases for fac
facilities as the
market evolves
We have seen a consistent increase in client demand since Aon created a
dedicated facultative team in 2016, and the market has evolved amidst that
growth. The property market has the strongest appetite for high excess
(outside attritional losses) per risk layers that exclude critical cat (named storm,
earthquake and flood) and shared/layered business. When those elements are
present, our facultative team can build significant limit below minimum ROL
prices. Aon has also created unique, automatic solutions in the facultative
market for treaty retentions. Critical cat peril-specific solutions have also been
explored and accepted by the market. The casualty market has the strongest
appetite for $500k xs $500k auto liability, umbrella auto carve-out and
commercial umbrella solutions. However, inconsistent with property, casualty
facultative facilities are not well positioned to build significant capacity with
premium to limit imbalance.
Aon 26
Casualty: Reinsurance Supply Offsets Loss Trends
Casualty insurers achieved a fair outcome at the 1/1/2024 renewal, driven largely by sufficient
reinsurance capacity despite reinsurer concerns around prior-year reserve development and adverse
litigation trends. While the renewal cycle began with many reinsurers making strong statements
regarding casualty market dynamics, the 1/1 renewals were ultimately completed in an orderly manner
compared to prior years.
Overall, the casualty market remains strong. Underlying primary casualty rates continue to be positive,
while interest rates, currently at their highest level in 15 years
, increases the present value operating
margins for casualty reinsurance. Investment yields on five-year US Treasuries, for example, have
increased from under 0.36 percent to 3.8 percent over the past two years, an important driver for
re/insurer returns.
During renewal negotiations, reinsurers were again focused on prior year development, underlying rate
change, and inflation (both social and economic.) Given that most metrics measuring inflation are
showing a significant decrease from the peak in summer 2021, reinsurers pivoted to citing concerns
around social inflation rather than economic inflation which is a stark contrast to last year’s renewal
cycle.
Reinsurers demonstrated a mixed appetite for growth amid concern around loss trends, broadly
dependent upon their respective positions during the 2015-2019 years. Reinsurers with less exposure to
those soft market years were poised for growth at 1/1; many markets who were not generally thought of
as large casualty supporters five to seven years ago have now established themselves as meaningful
partners this year.
With adequate capacity available, quota share ceding commissions were flat to slightly down. Insurers
who fared best at 1/1 shared several common characteristics: actual development in-line with expected,
meeting or exceeding targeted rate change, and clear articulation of value propositions that create
differentiation in the market. Insurers with outsized loss development or rate miss saw more significant
reductions in terms. However, in most cases, the increase in subject loss ratios outpaced the decrease
in ceding commissions resulting in generally favorable outcomes for insurers. Casualty excess of loss
business renewed, on average, at low single digit risk-adjusted rate increases. There were no significant
changes to program structure or conditions.
Reinsurers behaved similarly in international casualty, with strong initial messaging at the outset of the
cycle along with unfavorable initial quoting. Ultimately the reinsurers who did quote high authorized at
FOTs markedly lower than quotations, however some reinsurers reacted to this by reducing the shares
of reinsurers who quoted poorly.
For professional lines, quota share commissions again were scrutinized with a general downward trend
as the outcome, dependent largely on prior-year loss emergence and rate change. Excess of loss
treaties needed to be risk-adjusted rate change positive; the range varied from very-low single digit to
high single digit increases. Loss affected accounts were dealt with on a bespoke basis and outcome.
Aon 27
Topic
Commentary
Adequate supply
Capacity was adequate at the 1/1 renewal. A small number of reinsurers cut
back their casualty books while others sought more significant increases.
Despite strong messaging and aggressive quotes by some reinsurers, reinsurer
demand for casualty business overall meant programs were completed in line
with, or better, than expectations.
Differentiated
market
Casualty insurers entered the 1/1 renewal in a strong position and were well
prepared, given changing reinsurer behavior and concern for adverse US
litigation and loss development trends. The industry under-estimated planned
loss ratios during the soft market years 2014-2019, while uncertainty regarding
the impact of inflation and development patterns due to COVID-19 has led to
uncertainty for more recent underwriting years. Reinsurers continue to
differentiate between individual insurers rather than apply a broad approach.
Reinsurers that attempted to broad brush the market did not succeed.
US casualty
Ceding commission on casualty quota share reduced slightly, a positive
outcome given the larger increases in ceded loss ratios. Excess of loss casualty
business saw low single digit increases.
Workers’
compensation
Working layer excess of loss was responsive to loss experience and with low
rate increases generally yielding stable reinsurer margins. Catastrophe layers
were generally renewed at flat rates on line.
International
casualty
Demand for international casualty reinsurance was broadly stable, although
buyers were more considered at the January renewal, working with brokers to
test the market and understand the available options. Reinsurers continued to
push for the reduction of US operations exposure from international casualty
programs at 1/1 renewal. Capacity continues to be made available for US
operations, but capacity is being deployed more diligently and for a price.
D&O remains the
exception
With heathy primary rating, most liability reinsurance classes were stable at 1/1,
capacity, program structures and terms largely unchanged. The one exception
is directors and officers, where lower direct rates have led to reinsurers
becoming more cautious and risk selective. Aon’s public D&O pricing index for
Q3 2023 dropped 16.3 percent year-over-year, representing six consecutive
quarters of pricing decreases.
Alternative
solutions in
demand
Interest and deal activity in the alternative reinsurance and legacy space
remains strong. A growing number of insurers are exploring portfolio loss
portfolio transfer products as they look to efficiently manage their capital base
and deliver earnings protection, while smaller insurers are using structured
quota share reinsurance to release or provide capital. Reinsurers appetite for
legacy business remains strong, buoyed by higher interest rates. Reinsurers will
reward insurers that provide good quality data and that demonstrate emerging
risks have been considered in reserving.
Aon 28
Topic
Commentary
US auto
Insurance rates for US commercial auto experienced double digit rate increases
at 1/1, marking more than 10 years of price increases. Loss ratios for US auto
remain problematic with ongoing concern for nuclear verdicts and litigation
trends. In 2023, the US private auto insurance market posted its worst incurred
loss ratio for a first quarter in more than 20 years, according to S&P Global
. For
the full year 2022, the net combined ratio for the sector was 111.8 percent,
topping the previous high of 110.4 percent as seen in 2000. As a result,
reinsurance terms were under pressure.
UK motor
The average cost of motor insurance in the UK hit a new record in the third
quarter of 2023 as rates increased 29 percent year on year, according to the
ABI. UK motor insurers reported a net combined ratio in 2022 of 109.5 percent,
driven by the rising cost of vehicle repair and natural catastrophes. Reinsurer
behavior was mixed at 1/1, with some looking to grow at or below quoted terms,
while others were more challenging, but willing to work towards solutions.
Excess of loss reinsurance terms were unchanged and rates were significantly
lower, albeit the reinsurance cost per car on the road has increased as the rate
decreases in reinsurance were not as significant as the increases in original
rates. Quota share structures have held steady on margin, but buffers
increased as reinsurers demand higher and variable interest credit.
German motor
Motor reinsurance capacity was unchanged in Germany although reinsurers
were very vocal on original pricing and pushed clients towards further
increases. Original motor insurance rates for third party liability and physical
damage have increased by more than 10 percent due to high loss ratios from
increased repair costs and hail losses. Excess of loss treaties saw few
structural changes, with risk-adjusted rate increases in the low single digits.
Quota share commissions came under pressure as combined ratios exceeded
100 percent.
French motor
At 1/1, French motor insurers were looking for stability after an unexpected
increase a year ago. The withdrawal of the historical leader in the French
reinsurance market resulted in limited options for insurers when it came to
securing a lead reinsurer at 1/1. However, following capacity was plentiful and
there were no major issues in terms of placement. Broadly, motor reinsurance
prices experienced low double digit increases at 1/1 for lower layers, with
higher rate rises for unlimited layers. Re/insurers continue to experiment with
motor parametric covers, and while there is demand for motor aggregate
solutions, reinsurer appetite is thin for these products.
Aon 29
Specialty: By Line of Business
Agriculture: More orderly renewal
Renewals for the agriculture segment are often completed after January 1. However, signs indicate that
it should be a relatively disciplined and fair renewal for all parties. The hardening witnessed during the
2023 renewal was slightly offset by average reinsurer financial results, limiting their ability to achieve
modelled margins.
Expected profit margins were reduced by variable weather in the United States during the growing
season (a wet spring followed by high temperatures and dry conditions in the summer) and a major fall in
commodity prices. China has been affected by inclement weather along with livestock results suffering
from disease losses and a fall in pork prices. Italy had a huge flood event early in the season and a
massive hailstorm event late July. Spain also had a massive drought this year which caused dramatic
yield reductions. These events did not heavily impact the reinsurance market, compared to the 2021
Brazilian and Canadian losses, therefore their effect on renewals should be minimal. We expect most
territories to renew as expiring, although those that experienced 40 percent increases or greater in
2023 could see modest rate reductions if programs remain loss free.
Topic Commentary
Capacity changes
meet client demand
It is expected that there will be enough capacity to meet client demand in
2024. The reduction in commodity prices should bring overall capacity down
for US placements. The US will see some multi-year deals unwinding this year,
so those are expected to harden in line with the rest of the domestic stop loss
pricing. India renewed at April 1 with the first year of three-year deals. The
market overall had surplus capacity and the majority of the original insurance
business was capped. In some territories there might be a shortage of pro-rata
capacity unless insurers can tell a good underwriting story. However, if the
business is desirable with sound underwriting, all treaties will be placed and we
might see increased commissions, a point or two, from the punitive levels seen
in 2023.
Crop loss activity
2023 saw the return of the El Nino phenomenon, which can bring adverse
weather for crops. The worst events this year did not have a dramatic effect on
the crop insurance industry. The Italian floods early in 2023 were devastating
for property and crop risks alike. However, the underwriting measures taken
over the past few years and the severe limitation of catastrophe peril exposure,
meant this event added only a few points to crop loss ratios. The hail events
were more devastating, but since there is not much pro-rata placed in Italy,
losses were mostly felt on smaller stop loss programs. The massive drought in
Spain caused huge losses, the greatest in Spanish history, but the structure of
their crop re/insurance meant the bulk of these losses will be paid by
government entities. Only small parts of this loss entered the international
reinsurance market. There is also some evidence to suggest that farming
techniques and seed technology improvements are making crops more resilient
to extreme weather events
Aon 30
Opportunity for
2024
The market correction in 2023 is not expected to change much. Original
insurance rates may reduce slightly in certain territories but should remain
higher than 2022 renewals. There are growth opportunities for crop insurers
with expansion in new territories and new product innovation with remote
sensing advancements. The corporate sector could also be increasing demand
for crop insurance, driven by legislation to become more sustainable.
Aviation: A push for packaged deals
The aviation reinsurance market remained challenging at the 1/1 renewal, albeit more stable than a year
ago, which followed a major loss deterioration in the last quarter of 2022 and uncertainty surrounding
claims from the Russia-Ukraine conflict. The market’s exposure to losses arising from the conflict is
ongoing, with coverage litigation due to be considered in various legal jurisdictions during 2024. Russia-
Ukraine claims, aside, the market did not experience major losses in 2023.
Topic Commentary
Reinsurance
capacity stable
While demand for aviation reinsurance remains largely stable, the supply of
quota share capacity reduced, reflecting reinsurers view that rating levels
within the direct market need to improve. The supply of general XL capacity
has increased as a major reinsurer re-entered the market, and with some new
markets. Capacity has also grown as reinsurers have increased their written
lines to protect their shares on current business. However, if pricing is below a
threshold, capacity drops off sharply and placements can become distressed.
War capacity in
demand
Demand for aviation war reinsurance has increased, both for war excess of loss
and quota share, as a number of insurers look to enter the class, and as some
current war writers seek to expand their portfolios. War exclusions under wider
aviation policies have also led to an increase in demand for war specific
products. Supply of war reinsurance capacity is, however, largely unchanged,
while quota share capacity is particularly challenged, with premium income
being the main driver of reinsurer appetite. Excess of loss capacity is available
at the right price.
Restrictions on war
cover
All forms of hull war cover are now excluded from general protections and
third-party war liability is sub-limited to the reinsured’s share of $350 million
original market loss. Grounding cover is now sub-limited to the reinsured’s
share of primary $250 million original market loss. Further coverage restrictions
in 2024 are not expected.
Push for packaged
deals
A move to push for packaged deals was observed at the January renewals, with
insurers buying multiple products and where reinsurers favored excess of loss
and general placements over quota share and war. Certain reinsurers are trying
to link signings across quota share and excess of loss business, in addition to
linking signings across war and general business.
Aon 31
Cyber: Pioneering innovation with first cyber cat bond
Demand for cyber catastrophe reinsurance protection is at an all-time high, as the market’s first cyber
cat bond and talk of a US federal cyber backstop signal an exciting new phase for the market.
After a period of rapid and intense hardening in 2021, the cyber insurance market is now in positive
territory, despite an uptick return of ransomware activity in 2023.
Having stabilized in the second half of 2022, the cyber insurance market started to give rate reductions
in 2023, especially in higher excess layers where new capacity has entered the market. Overall, there is
ample capacity in the cyber insurance market to meet current demand with most insurers demonstrating
increased appetite for cyber risk.
The frequency and severity of ransomware attacks, the main driver for cyber insurance claims in recent
years, started to tick upwards in 2023, following a reduction in activity in 2022 as ransomware groups
were affected by the Russia-Ukraine conflict and an increase in law enforcement. While 2022
underwriting performance was profitable from improved underwriting discipline by insurers, 2023 faces
relative headwinds due to uptick in ransomware and the competitive pressures on pricing. The average
loss ratio for the largest 20 cyber insurers in the US in 2022 was just under 44.6 percent, down from
66.4 percent in 2021, according to the NAIC.
While competition has undoubtedly increased, metrics from Aon’s CyQu3 risk assessment show that the
cyber security posture of organizations seeking cyber insurance continues to improve, especially for
large commercial cyber risks. Also, the improved underwriting discipline made by insurers in 2023
cannot be discounted since the large spike in ransomware claims experienced by the market in 2020.
This activity was driven by frequency, and subsequent attritional loss across a large spectrum of
policyholders. In the aggregate, it pushed loss/combined ratios to an unsustainable place. We observed
over a 1,100 percent increase from 2022 to 2023 in cyber event reporting, yet loss ratios have improved
or, at minimum, held. The economics are favorable due to pricing corrections from 2020 through 2022,
but the stability of loss ratio performance despite the massive uptick in reporting in 2023 also suggests
security control improvement seems to be improving the attritional aspect of portfolio management
down market. Less events are developing poorly. The counter argument is the recent uptick of severity
issues merit attention, insureds have invested in cyber security, improving access management controls
and backup strategies. Cyber risks are becoming better risks, while at the same time an insurer’s ability
to understand cyber, select risks and manage exposures, is continually improving.
Topic Commentary
Buyers’ market for
cyber reinsurance
The return to heathy results in the cyber insurance market affected the
demand-supply balance at the 1/1 renewals, to the benefit of cyber reinsurance
buyers. As long-term confidence in the cyber market continues to build,
insurers are looking to reduce the amount of business ceded to reinsurers,
putting quota share ceding commissions under upwards pressure at the
January renewal, which sees a significant number of large cyber quota share
portfolios renewing.
3
The Cyber Quotient Evaluation (CyQu) is Aon's proprietary eSubmission platform that helps clients identify, measure
and manage their cyber risk exposure.
Aon 32
Discussions on war language in cyber re/insurance policies were again a major
focus at the January renewal. Reinsurers have taken divergent views and
approaches to cyber war, although there was sufficient capacity and flexibility
from some players in the market to get complete programs without the need to
implement any changes to war clauses.
War exclusions are, however, only part of the bigger issue, of how the industry
mitigates the potential risks of catastrophic and systemic cyber events. Critical
infrastructure exclusions, which limit insurers’ exposure to a major power
outage or disruption to an internet service provider, are a significant source of
systemic exposure for the market. There is wide acceptance in the US
commercial insurance market for critical infrastructure exclusions, although
these may have to broaden with developments in cyber risk and deepening
digitalisation.
The potential for a catastrophic and systemic cyber event is understandably a
real concern for the insurance sector. A cloud outage or a massive contagious
malware attack that has a widespread impact across the economy could result
large losses for the industry. Consequently, cyber catastrophe loss aggregation
is also a key area of protection need for insurers. When looking at occurrences
of cyber events with widespread impact in recent years, there have been a
number of small events and “near misses” (e.g. Solarwinds, MOVEit).
Aggregation of losses from these events is a significant source of loss volatility
for individual insurers. According to Aon’s Cyber Threat Intelligence team’s
analysis, recent history suggests approximately 2.2 widespread cyber events
with potential to impact the cyber insurance market, in any 12-month period.
Federal backstop
There is also encouraging progress on a potential federal backstop for
catastrophic cyber risk in the US, which would build on a similar public-private
sector solution for terrorism. Aon has been supporting the US Treasury
Department’s Federal Insurance Office, helping to define, model and quantify
systemic cyber-events. If the backstop is enacted to complement capital
participation on catastrophic cyber risk, much needed coverage clarity and
protection against tail events will help to free up capital to support growing
demand for cyber insurance.
Improving coverage certainty and developing a market for cyber catastrophe
protection at scale is critical if the industry is to unlock the huge growth
potential in the cyber insurance market. Some estimates predict the annual
global cyber insurance premium could reach between $25-$30 billion by the
end of 2027, up from an estimated $15 billion today. With digitization and rapid
advances in technology like artificial intelligence, demand for cyber insurance
solutions can only grow and evolve in the kinds of risks it protects.
Pioneering cyber
cat bond
The catastrophe bond market is spearheading the development of a
catastrophe-based cyber reinsurance product. In November 2023, Aon
Securities structured and distributed a cat bond issuance from Long Walk Re,
the market’s first 144A cyber catastrophe bond, for the benefit of AXIS Capital.
Aon 33
The pioneering bond provides AXIS with $75 million of fully collateralized
indemnity reinsurance protection for systemic cyber events on a per
occurrence basis. The transaction received broad investor support, and
demonstrates catastrophe bond investors’ ability to work with insurers to
provide meaningful catastrophe-based cyber protection.
Long Walk Re marks an important milestone for the insurance-linked securities
market, and for the wider global cyber insurance market. It demonstrates there
is both demand from insurers, and appetite from investors, for event-based
catastrophe cyber protection. Three additional cyber catastrophe bond
transactions are expected to be placed by the end of 2023, including East
Lane VII Re, which was placed by Aon Securities in December 2023 and will
provide $150 million of protection for Chubb. Aon Securities projects that over
$400 million of cyber limit will have been placed into the catastrophe bond
market at the end of 2023. With a total cat bond market value of approximately
$42 billion, there is significant runway for growth in the cyber cat bond space.
Cyber reinsurance
The cyber reinsurance market is entering an exciting new phase. As demand
for cyber insurance continues to grow, insurers will have a comprehensive suite
of reinsurance and alternative products to address their protection needs,
quota share, excess of loss, catastrophe reinsurance, and cat bonds.
In line with the developments on cyber cat bonds, Aon placed a record number
of catastrophic event reinsurance contracts at the January renewals and sees
these products as the fastest growing product type within cyber reinsurance.
This is driven by increased market maturity around the key challenges of
developing catastrophic cyber event definitions and modelling of catastrophic
cyber risk.
Aon 34
Marine, Energy, Political Violence and Terrorism (PVT) and
Renewables: War coverage complicates renewal
Reinsurer appetite for marine and energy increased at the January renewal, leading to a significant
increase in supply at a time of relatively flat demand. War and political violence risks, however, remain
challenging due to ongoing regional conflicts and broader volatile geopolitical environment.
Topic
Commentary
Marine & energy
The marine, energy and composite 1/1 renewals were characteristically late,
and for the second year in a row complicated by discussions on the appropriate
coverage for a live war event. Pure marine and energy deals were relatively
orderly, with price and coverage equilibriums established quickly, helped by
significant increases in reinsurer appetite for the class. There were minimal
changes in marine and energy structures were made at the January renewal.
War and political
violence
Where war, political violence and terrorism classes were included, placements
were much more complicated. Coverage for Israel and the surrounding region
was uncertain until late into the renewal season, with reinsurers looking to
increase price and reduce coverage in a meaningful way for the second year in
a row. With 50 percent of the world’s population living in a country facing an
election in 2024, reinsurers were particularly cautious around coverage for
strikes, riots and civil commotion perils. Demand for political violence and
terrorism quota share and industry-loss warranty (ILW) products increased at
1/1 as ultimate net loss products become less effective based on the price and
event definitions.
Renewable energy
The re/insurance market continues to explore ways to support decarbonization
and the energy transition. While there has not been a meaningful change in
approach or appetite to fossil fuels over the last 12 months, there is a desire to
expand the energy offering to include renewable lines. The approach remains
cautious, with most markets preferring to access the business through either
consortium or as reinsurance, deferring to underwriters with greater levels of
experience in the developing technologies involved.
Aon 35
Trade Credit, Structured Credit and Political Risk, and Surety:
Growth continues amid economic and political uncertainty
Despite continued global economic uncertainty, the credit insurance market remains relatively stable,
although concerns continue from potential economic market fluctuations and further impact from
possible political events in 2024.
With largely sufficient capacity in the market, proportional pricing is stable, although there has been
evidence of some profit related improvements. Excess of loss pricing, however, is seeing a repeat of
2022/2023 with increases predominantly due to increased exposure levels as well as a repricing of risk
to reflect the macro-economic uncertainty. Surety business is the most challenged segment, especially
in the US, as there has been an increase in claims activity impacting reinsurers.
Across the market, loss ratios have increased in 2023, although this was very much expected given the
low loss ratio scenario that has existed since COVID-19. Loss ratios in the trade credit and structured
credit areas remain positive leading to the stability of terms.
Topic Commentary
Growing exposure
Exposures in the market are increasing, both in terms of the size of individual
risks and in the overall aggregate due to inflation’s impact and, in certain areas,
increased demand from banks. Where insurers have sought to purchase higher
limits, reinsurers have been accommodating, where requests are reasonable
and correspond to program structures. However, given current levels of
capacity usage, brokers and insurers resisted some reinsurers’ efforts to raise
attachment points on excess of loss covers.
Structured credit &
political risk
Insurers and reinsurers continue to closely monitor exposure to emerging
market debt, most notably African sovereign debt. Claims have materialized in
the last 18 months, notably in Ghana and Zambia, although losses appear to be
manageable at this time. This segment has also seen claims related to the
Ukraine-Russia conflict crystalize in 2023, although these also remain
manageable in relation to the overall market.
Trade credit
The (whole turnover) trade credit reinsurance market is stable, with ample
capacity. Despite current economic and geopolitical uncertainty, increasing
default rates in the wider economy, and growing exposure levels, trade credit
insurance losses have been below normal levels, a reflection of government
support for economies during COVID-19 and insurers continuing to exercise
prudent risk selection.
US surety
The US surety market continues to grow supported by ongoing GDP growth,
continued post-COVID increases in infrastructure investment and construction
activity, and inflation’s impact. Overall, the market remains profitable, with loss
ratios in the low 20 percent range for the first nine months of 2023; however,
claims with increased severity have impacted some reinsurance programs. This
is viewed as the most problematic area in the global credit market causing
tightened capacity during the 1/1 renewal, with some firming of rate and
pressure on retention levels.
Aon 36
International surety
Reinsurer scrutiny of international surety has increased due to challenges in
the global construction sector, which resulted in increased insolvencies and
claims especially in Europe, Asia Pacific and Africa. Reinsurers adopted a more
cautionary approach to business with this background.
US Mortgage: A return to normalcy?
Demand in the US mortgage reinsurance line of business is driven primarily by the government
sponsored enterprises (GSEs) Fannie Mae and Freddie Mac as well as the six US mortgage insurers (US
MIs). After a record volume of $18 billion of mortgage reinsurance was purchased in 2022, limit
purchased in 2023 was reduced by over 50 percent to levels more similar the recent pre-COVID years.
Pricing, which hardened in 2022 for several reasons, started to soften in late 2023 due to both an
improved housing outlook as well as increased competition. Next year should bring the opportunity to
innovate on new reinsurance structures and concepts to help maintain reinsurance’s position as a
unique offering to mortgage reinsurance buyers.
Topic Commentary
Constrained
capacity in 1H
2023
After a record 2022 regarding limit placed in mortgage reinsurance, capacity
was constrained to start 2023 as certain reinsurers were faced with internal
constraints. Several factors contributed to the capacity challenge: (1) Record
2022 volumes, (2) Slowing home price growth reduced the rate at which
borrowers gained home price equity, and (3) Higher interest rates reduced the
speed that borrowers prepaid their mortgages. Both (2) and (3) reduced the
speed at which prior deals de-risked and made aggregate exposure to loss
remain higher for longer. As the year progressed and since new volumes
reduced in 2023, the aggregate capacity for mortgage reinsurance improved.
Changes in GSE
buying behavior
In 2020 the GSEs became subject to a new capital regime referred to as the
Enterprise Regulatory Capital Framework (ERCF). The GSEs also recently have
been allowed to rebuild some of their own capital base through retained
earnings and given more flexibility on the magnitude of credit risk transfer
(CRT) they need to purchase. This has led to a focus on the capital efficiency of
CRT structures. Both GSEs have raised their retentions this year and we have
seen the introduction of several deal features designed to align CRT more
closely with the ERCF framework.
Softening prices in
2H 2023 as
reduced demand
became apparent
In 2022 mortgage reinsurance prices rose throughout the year due to a record
amount of demand, significant price increases in the competing capital markets
execution, and uncertainty in the housing outlook. Those prices remained
elevated for most of 2023. However, as reinsurer capacity constraints eased
and the housing outlook improved, there has been some softening of price and
increase in reinsurance supply of available. We expect this trend will continue
into early 2024.
Aon 37
Contact
Joe Monaghan
Global Growth Leader
Reinsurance Solutions, Aon
o: +1 312.381.5336 m: +1 312.560.5541
joseph.monagha[email protected]
About Aon:
Aon plc
(NYSE: AON) exists to shape decisions for the better — to protect and enrich the
lives of people around the world. Our colleagues provide our clients in over 120 countries
with advice and solutions that give them the clarity and confidence to make better
decisions to protect and grow their business. Follow Aon on
Twitter and LinkedIn.
Stay up-to-date by visiting the Aon Newsroom and sign up for News Alerts here.
This Document is provided for the purpose of providing general information and is not intended, nor shall it be construed as (1) an offer to sell or a
solicitation of an offer to buy reinsurance, (2) an offer, solicitation, confirmation or any other basis to engage or effect in any transaction or contract (in
respect of reinsurance, a security, financial product or otherwise), or (3) a statement of fact, advice or opinion by Aon or its directors, officers, employees,
and representatives (collectively, the “Representatives”). Any projections or forward-looking statements contained or referred to in this Document are
subject to various assumptions, conditions, risks and uncertainties (which may be known or unknown and which are inherently unpredictable) and any
change to such items may have a material impact on the information set forth in this Document. Actual results may differ substantially from those indicated
or assumed in this Document. No representation, warranty or guarantee is made that any transaction can be effected at the values provided or assumed in
this Document (or any values similar thereto) or that any transaction would result in the structures or outcomes provided or assumed in this Document (or
any structures or outcomes similar thereto). Aon makes no representation or warranty, whether express or implied, that the products or services described in
this Document are suitable or appropriate for any cedent, sponsor, issuer, investor, counterparty or participant, or in any location or jurisdiction. Aon and its
Representatives shall have no liability to any party for any claim, loss, damage or liability in any way arising from or relating to the use or review of this
Document (including without limitation any actions or inactions, reliance or decisions based upon this Document), any errors in or omissions from this
Document, or otherwise in connection with this Document.
The information in this document is based on or compiled from sources that are believed to be reliable, but Aon has made no attempts to verify or investigate
any such information or sources. Aon undertakes no obligation to review, update or revise this Document based on changes, new developments or
otherwise, nor any obligation to correct any errors or inaccuracies in this Document. This Document is made available on an “as is” basis, and Aon makes no
representation or warranty of any kind (whether express or implied), including without limitation in respect of the accuracy, completeness, timeliness, or
sufficiency of the Document.
© Aon 2024. | All rights reserved.
This Document is strictly confidential. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any way or by any
means, including photocopying or recording, without the written permission of the copyright holder, application for which should be addressed to the
copyright holder.
Aon Securities Inc. 2024 | All Rights Reserved Aon Securities Inc. is providing this document and all of its contents (collectively, the “Document”) for general
informational and discussion purposes only, and this Document does not create any obligations on the part of Aon Securities Inc., Aon Securities Limited or
their affiliated companies (collectively, “Aon”). This Document is intended only for the designated recipient to whom it was originally delivered and any other
recipient to whose delivery Aon consents (each, a “Recipient”). This Document is not intended and should not be construed as advice, opinions or
statements with respect to any specific facts, situations or circumstances, and Recipients should not take any actions or refrain from taking any actions,
make any decisions (including any business or investment decisions), or place any reliance on this Document (including without limitation on any forward-
looking statements).