Traditional reinsurance carriers have taken significant losses from Australian insurance carriers in recent years, as a result of which their appetites have waned for some lower layers of reinsurance towers, forcing carriers to look at alternatives.
This is according to insurance and reinsurance broker Aon, who highlight that there could be an increasing focus on alternative capital sources and instruments with parametric triggers, as insurers look to keep their reinsurance towers intact at the lower levels.
“Reinsurers sought significant rate increases at the Australian June and July renewals, and many were not willing to attach to lower catastrophe layers, at any price,” Aon explained in its latest renewals market report.
“The market pushed for higher retentions as reinsurers sought to move to cover tail risk rather than be over-exposed to a frequency of catastrophe events,” the broker further explained.
One of the drivers of risk-aversion at the lower-layers of reinsurance towers has been the impacts and losses suffered from so-called secondary peril events in Australia in recent years.
Insurers in Australia have paid out significant sums in catastrophe claims in recent years, with flooding, convective storms and wildfires key drivers of this.
Many reinsurance programs have attached, both at the aggregate and occurrence levels, which has driven an aversion to low-down risks among the reinsurers that have taken the bulk of those losses.
The Australian market has used fronted alternative capital, but ILS and capital markets are still not as prevalent in catastrophe reinsurance towers there, as they are in places such as the United States.
Now, it seems, Aon believes there could be more demand for alternative capital, ILS and innovative risk transfer structures.
That could be an opportunity for some ILS funds, that have the expertise to analyse and underwrite Australian natural catastrophe risks and who have an appetite for the lower-layers.
Aon explained, “Challenges in sourcing traditional indemnity reinsurance cover at the lower end of catastrophe programs in the Australian market is expected to drive interest in alternative capital and parametric solutions, as well as the need for further investment in climate science and modeling of secondary perils.”
At the same time, there is increasing demand for property catastrophe reinsurance in Australia, Aon believes, with inflation and recent year’s losses seen as drivers of this.
Again, that could provide opportunity and perhaps we’ll see increasing ILS market participation right throughout the Australian cat reinsurance towers, which could also translate into catastrophe bond activity in time as well.