Capital entering reinsurance in 2023 will be rewarded: Aon’s Monaghan

New capital that enters the reinsurance market in 2023 is expected to be rewarded, thanks to strong demand for protection and the attractive terms that capital can be deployed at, according to Joe Monaghan, Global Growth Leader at Aon’s Reinsurance Solutions.

After a “turbulent” January reinsurance renewal season, that Monaghan says came to a “pragmatic” outcome, there are now signs that some are looking to “take advantage of improved conditions”, he explained.

However, in time for the 1/1 renewals, “The capacity entering the market at January 1 fell well short of withdrawals earlier in the year,” Monaghan said.

But, under the new and elevated pricing of reinsurance and retrocession, Monaghan is now more confident that capital inflows could resume, it appears.

“New capital may flow into the reinsurance market in the first quarter attracted by the certainty of returns and improved underwriting conditions that were established at the renewal,” he stated.

Going on to say that, “Capital entering the reinsurance market in 2023 will be rewarded by strong demand and attractive terms.”

In fact, Aon’s Reinsurance Solutions division believes demand will continue to rise, for reinsurance protection.

Monaghan commented that, “We believe many clients will reevaluate their retained volatility in the first quarter and several may consider additional reinsurance purchases.”

Optimising capital has become more important than ever, while reinsurers are shifting towards capital protection, over earnings, adding to the potential for volatility in results for insurers.

“Reinsurance remains an accretive source of capital for insurers when compared with debt and equity. However, the re-setting of the reinsurance market at January 1 has important implications for insurers’ capital management and balance sheet protection,” Monaghan said.

Considering alternative capital solutions is one way clients can secure optimal placement results, Monaghan and Aon’s Reinsurance Solutions believe, highlighting the important role of insurance-linked securities (ILS) within overall reinsurance program arrangements.

The prospects of higher returns going forwards may drive new capital formation in traditional reinsurance, as well as inflows to ILS funds, Aon’s Reinsurance Solutions unit believes.

The ILS market is poised for growth, which should deliver additional valuable capital for re/insurers, the broker believes.

Capital wants to see evidence of the rewards on offer, which should become more available as 2023 progresses, so it is still questionable how quickly any significant volume of reinsurance capital builds up again in the market.

With reinsurance capital in shortfall at the moment, while demand is outstripping supply across both traditional and ILS or catastrophe bond protection, the gap needs filling first before the market can begin to find a balance in supply and demand, or even see capital weight tipping it back into softening.

But investors are going to be keen to have their say, in defining what constitutes a rewarding deployment of capital.