Reinsurance demand to increase, market’s not perma-soft: Aon Benfield

by Artemis on September 13, 2015

Demand for reinsurance capacity is set to accelerate, but conditions will remain challenging, according to Aon Benfield. However, while opportunities for growth still exist, the broker does not see the market as being in a permanent softened state but does expect the cycle to be different.

Brighter news from Aon Benfield coincided with the weather improving, at the reinsurance brokers’ press briefing in Monte Carlo at the annual Rendez-vous today where the market awoke to torrential rain today.

With pressures continuing to impact reinsurers they could perhaps do with some brighter news and the broker provided some today.

As reinsurance companies continue to seek out quality and accretive reinsurance capital, to aid their growth strategies, the record amount of capital in the space has slowed its growth. And at the same time as this growth has slowed, Aon Benfield said that it sees this as just a pause, opportunities to put more capital to profitable underwriting use, rather than return it to shareholders, will be welcomed.

One of the factors expected to increase demand is changes to rating agency models, in particular A.M. Best’s update to its criteria that could push insurers to become better protected against catastrophe exposures.

That’s a positive for both the traditional market and ILS or collateralised reinsurance players, as well as catastrophe bond investors who could also stand to gain an increased amount of risk to allocate to.

Alongside this the ongoing privatisation of re/insurable risk from government and sovereign risk pools is expected to continue, bringing new opportunities for reinsurance capital to back the catastrophe exposures of the world, including in emerging markets.

Again, this growth opportunity, as demand rises from risk that gets turned over to the private market, is a key opportunity for ILS to maintain steady growth.

And while Aon Benfield does expect continued pricing pressure over the coming year, it sees increasing demand as at least providing opportunities for those reinsurers that are innovative and able to grasp them.

Bryon Erhart, CEO of Aon Benfield Americas, explained; “Reinsurance market dynamics in 2015 continue to provide our clients with very high quality options to source accretive underwriting capital – we expect these dynamics to remain through the upcoming January 1, 2016 renewal cycle.”

In fact, Aon Benfield acknowledged that the capital is ready to fulfill any new increase in demand, with the much discussed sidelined capital ready and willing to be mobilised.

The ILS market maintains a steadily growing share of the global reinsurance capital that is available, with a recent slowdown in growth simply a reaction to market factors.

Paul Schultz, CEO of Aon Securities, the brokers ILS and capital markets unit, explained that ILS investors and fund managers have been responding to the market factors of demand, low rates and capital deployment opportunities, resulting in a slowdown of growth.

But this slowdown is expected to be a pause, similar to the pause in growth of reinsurance capital supply in traditional placements as well, with further growth in demand likely to release more capital markets capacity in future.

In a reinsurance market report released today, Aon Benfield writes; “Asset managers continue to exercise discipline in their interest in the insurance space, but substantial capital is available to enter to meet new sources of reinsurance demand.”

Aon Securities sticks to its forecast of up to $150 billion of alternative and ILS capital in the reinsurance market by the end of 2018. The forecast is now officially $120 billion to $150 billion by that point, but that seems easily achievable if more demand can be unlocked.

Perhaps the best news for traditional reinsurers, while unsurprising to those following the development of the market in recent years, is Aon Benfield’s forecast that the reinsurance market will not be soft forever.

Speaking at the press briefing today, Dominic Christian, Executive Chairman of Aon Benfield International, explained; “We will not live in a permanent soft market.”

He said that the insurance cycle will continue to exist, driven by supply of capital and demand and that this is set to continue, but also noted that reinsurance remains “attractive and profitable”, which for reinsurers means will result in future inflows from the ILS capital on the sidelines when demand allows.

Later, Christian said; “We keep being told about what a soft market it is, for instance in various sectors. That probably comes from the perception of price falls in some of the larger classes of business, property being the obvious example.”

“But we are looking for capacity in some lines of business,” Christian continued, suggesting that right now there are opportunities for reinsurers and capacity providers who look to the right areas and specialties.

“To me I think we’re going to see a different market, always. I don’t think you see the same kind of generalised statement of soft market – hard market, unlikely,” he explained.

So while the reinsurance market is not expected to be permanently soft, and the insurance cycle is expected to still exist, Aon Benfield does expect the cycle to be different going forwards.

A different reinsurance market. That will still be gloomy news for some traditional reinsurers, especially those that cannot adapt to the changing structure and capital base we see happening today.

But more demand is brighter news. And for those reinsurers ready to grasp opportunities for growth, innovation and ready to leverage new capital, when it is the right fit, the prospects are certainly brighter.

Read all of our Monte Carlo Rendez-vous 2015 coverage here.

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