A renewal perfect storm, true hard market approaches: Aon’s Monaghan

Reflecting on the June and July 2022 mid-year reinsurance renewals, broker Aon calls these a “near-perfect storm” for reinsurance buyers and explains that a “true hard market” may be fast approaching.

Of course, the mid-year 2022 reinsurance renewals are not yet over, with signings still to be completed and some carriers struggling to secure the protection that they need.

But overall, Aon’s Reinsurance Solutions Global Growth Leader Joe Monaghan feels that “the majority of insurers were ultimately able to satisfy their reinsurance needs,” despite the challenges faced.

“Reinsurance buyers faced a near-perfect storm in June and July, as capacity constraints collided with rising demand for reinsurance protection,” Monaghan explained.

Reinsurers were seen to reduce their risk appetites, in the wake of years of heavy natural catastrophe and severe weather losses.

Monaghan points out that this is the first time since 2005 that, “Property natural catastrophe capacity contracted materially, and some reinsurers would not write certain risks – such as lower layers of reinsurance limit for Florida catastrophe risk – at any price.”

Specialty reinsurance also faced “its most challenging renewal in a generation” thanks to the potential for large losses from the Russia – Ukraine conflict, but in casualty reinsurance it was a different picture, as it remained stable, despite some concerns over social inflation and emerging risks.

“Inflation and volatility in investment markets, combined with elevated natural catastrophe losses, drove demand for higher reinsurance limits. Increased demand, however, was met by capacity constraints as reinsurers came under mounting pressure from investors to address earnings volatility and reduce catastrophe exposures,” Monaghan explained the reinsurance renewals backdrop.

Unrealised investment losses also dented reinsurer capital, as it fell roughly $30 billion by March 31st. That number has likely dropped further in the last quarter as well.

Conversely, growth in the catastrophe bond market helped alternative capital to another quarter of growth, Aon’s Monaghan said, which we’ll go into in more detail later today.

Looking ahead to future reinsurance renewals, Monaghan said that, “The property reinsurance market may be fast approaching a true ‘hard’ market.”

By this he means a market where overall demand is not readily satisfied, which could present a further opportunity for ILS and catastrophe bond growth, given the ability of the insurance-linked securities (ILS) market to respond to sponsor needs in the last quarter as well.

“Inflation, economic and financial markets uncertainty, and climate change, will put insurer capital under increasing pressure, just as reinsurers retrench,” Monaghan said.

Adding that, “Attracting new sources of capital to the market, combined with data-led portfolio differentiation, will be essential to meeting insurers’ reinsurance needs going forward.”

The ILS market and its fund managers have a clear opportunity to begin planning for any new capacity requirements now and it will be important that broker-dealers are speaking with potential catastrophe bond sponsors for later in the year, as well as cat bond fund managers, to ensure capacity is available should demand spike even further than seen in the last two months.

Read all of our reinsurance renewals news coverage here.