Retro capacity again cited as helping to smooth renewal, in Aon report

Once again, the availability of retrocessional reinsurance capital and capacity has been cited as a factor that helped to ease the January 2024 reinsurance renewals, with Aon saying it was a factor that drove a “relatively smoother” renewal outcome for cedents.

Aon Reinsurance Solutions’ latest renewals report explains that the January 2024 reinsurance renewals proceeded “relatively smoothly,” in comparison to the stressed market environment seen a year earlier.

Key to this smoothing of the renewals, was “a rebound in profitability and capital positions, and greater availability of retrocession capacity,” Aon explained.

These factors helped to encourage reinsurance underwriters to “display increased risk appetites at the enhanced terms established in 2023.”

Aon is not the first to highlight improved retrocession market conditions and inflows of new retro capital, as helping to smooth out the renewal marketplace.

On the demand-side of the renewals, reinsurance capital was readily absorbed by cedents, while countering this, Aon said that reinsurance capital supply was strong.

Aon further noted that reinsurers were “actively trying to achieve their desired signings” at the 1/1 renewals, as they looked to secure deployments of capacity to reinsurance programs at the current elevated returns, at current pricing, terms and conditions.

For the mid to upper layers of catastrophe reinsurance towers for peak perils, this was especially evident, while more broadly than in property catastrophe risk, Aon said that reinsurance renewal rates were “flat to modestly up on a risk adjusted basis across most lines of business.”

At the same time, reinsurers were keen to build on their relationships with cedents, with many underwriters strategically targeting key clients with whom to grow, looking to secure broader diversification of their global reinsurance portfolio.

But, Aon noted that, “This was not the experience for programs, segments and regions that ceded significant losses to the market in 2023 and from whom reinsurers demanded significant price increases for 2024.”

So, while a smoother outcome for the renewals, it remained differentiated and reinsurers remained keen to hold the line on price and terms where they could, perhaps with terms proving the more sticky at the higher-layers of catastrophe reinsurance towers.

One other interesting insight from Aon’s latest reinsurance renewals analysis, is that the broker notes certain headwinds that are proving a challenge to new investment coming into the reinsurance space.

Aon’s Reinsurance Solutions highlights, “continued uncertainty around the impact of climate change, inflation, litigation funding, and geopolitical risk on ultimate loss costs.”

Adding that, “These unknowns are creating headwinds to new investment, despite the expectation that most reinsurers will have easily covered their cost of capital in 2023.”

These factors have been making investors more nervous about longer-term capital deployment into reinsurance, which has proved a challenging factor for those seeking to launch reinsurance start-ups over the last couple of years.

There’s a chance the higher returns currently being achieved help to encourage more of this private equity and longer-term equity capital into the space, but these investors are (in our experience) watching underwriters very closely for any signs that discipline could lessen, so it may take more than the single year of strong results we’ve just seen, for any meaningful and numerous new “Class of” reinsurers to emerge.

Read all of our reinsurance renewals coverage here.