Alternative capital set for robust year as traditional capital decreases, states Aon
Reinsurance buyers faced “a near-perfect storm” during the mid-year renewal period, as reinsurance capacity constraints were exacerbated by insurers’ rising demand for reinsurance protection.
According to Aon data, reinsurer capital decreased to $645 billion at 31 March 2022, from $675 billion at 31 December 2021.
Within that total, alternative capital increased to $97 billion, as investors recognised the value of diversification and increased margins amid more turbulent financial markets, with demand outpacing supply.
For the first time since the devastating US hurricanes of 2004 and 2005 – which included Charley, Ivan, Katrina, Rita and Wilma – property natural catastrophe capacity contracted during the renewals period, particularly for lower layers of reinsurance limit for Florida catastrophe risk.
Inflation and volatility in investment markets, combined with elevated natural catastrophe losses, drove insurer demand for higher reinsurance limits.
In contrast, the casualty reinsurance market remained stable, although concern for social inflation and emerging risks also made for more challenging renewals.
Despite challenges, the majority of insurers were ultimately able to satisfy their reinsurance needs during the renewals.
Joe Monaghan, global growth leader for Aon’s Reinsurance Solutions, said: “The property reinsurance market may be fast approaching a true ‘hard’ market, where overall demand is not readily satisfied.
“Inflation, economic and financial markets uncertainty, and climate change will increase volatility and put insurer capital under growing pressure, just as reinsurers retrench.
”Rethinking access to capital by attracting new sources of capital to the market, combined with data-led portfolio differentiation, will be essential to meeting insurers’ reinsurance needs going forward, allowing insurers to retain flexibility and make better business decisions.”
The report also highlights how insurer differentiation is critical due to reinsurers’ growing proclivity for “quality risk”.
Monaghan added: “Differentiation and anticipating reinsurer concerns is increasingly key to insurers’ securing their support, obtaining the best available terms and conditions, and maintaining business resilience.”