Aon: Reinsurance capital should run towards risk, help on frequency / earnings protection

Broking group Aon has set out its stall for the reinsurance renewals, calling on reinsurance capital providers to run towards risk instead of away from it, else risk the industry becoming less relevant.

By leaning into risk reinsurers can help to create a more sustainable market, the Aon Reinsurance Solutions team believe.

In the run up to the Monte Carlo Rendez-Vous event this year, discussions with brokers have focused on their goal to regain some of the ground lost in recent years for their clients.

Aon is the most vociferous on this, seemingly intent on creating more coverage options for their clients, especially on frequency risks and to protect earnings as well as capital.

All of which speaks to the broker’s desire to see more reinsurance capital deployed to support aggregate limit for clients, as well as sideways covers and lowering of the currently elevated retentions.

Which puts the broker somewhat at odds with many of the world’s largest reinsurers and also most insurance-linked securities (ILS) capital providers, who continue to state their aim for the renewals as being to remain disciplined and sustain contract terms such as attachment points, with little appetite to give anything away.

Aon highlights that despite an elevated catastrophe loss burden in the first-half of the year, reinsurers and other reinsurance capital providers are making very attractive profits.

In fact, they highlight the 25% ROE’s earned by some reinsurers as “well above that of most primary insurers and their own cost of capital.”

But added that, “However, higher retentions in insurers’ catastrophe programs reduced capacity for frequency covers and resulted in an unequal distribution of underwriting profit across the insurance value chain.”

It is this unequal distribution of profits that Aon wants to change, it seems. As the broker clearly feels reinsurance capital is earning a greater share than it should do.

Rupert Moore, UK CEO of Reinsurance Solutions for Aon, explained, “If the reinsurance market is to provide real value, it must play a more active role in helping insurers to manage frequency losses and earnings volatility.

“If reinsurers continue to run from risk, it will force insurers to follow suit and we will all become part of a shrinking, and less relevant industry.”

Of course, the elevated returns currently being enjoyed come after years of returns below cost-of-capital and greatly compressed spreads in catastrophe bonds and insurance-linked securities (ILS).

Where profit goes is also partly driven by underwriting discipline, which in many areas of the primary market has been seen to be lacking even through the period where reinsurers were picking up so many of their losses.

Right now, one only has to look at the rating downgrades of some mutual insurers in the US, that historically had benefited from ample reinsurance and aggregate covers, but now without those and with higher attachments are finding it impossible to remain profitable.

Which begs the question. Should reinsurers want to deploy their capital simply to support an insurers ability to sustain its business?

All of which highlights a selective and differentiated approach will be needed at the January 2025 reinsurance renewals, as there is going to be significant pressure from brokers to regain ground for their clients, but capital providers on the traditional and ILS side will need to be cognisant of performance and which companies are worth backing.

It’s going to mean negotiations are tough and the renewal could prove late as a result, we suspect, as contract terms get debated right down to the January 1st wire.

Which also means there will be significant winners, those prime performing primary insurers that everyone wants to deploy reinsurance capital to, that will likely regain some of the ground they seek and also get perhaps better pricing at the same time.

For those with a less admirable track-record, or more thinly capitalised, it may be that no ground is recovered on the terms of coverage front, but they may get a little back on price instead. Which should encourage them to continue improving their businesses.

Ultimately, Aon has put its flag in the ground, saying today that, “Aon forecasts an increase in pricing competition in 2025, and that insurers will begin to see greater flexibility around capacity provision and coverages.”

That’s a given at the renewals, but how successful brokers will be for all clients remains to be seen. For some they will be very successful, especially if the market remains free of major losses through the rest of the year, but for others there could be little success at all and terms as well as attachments may stick once again.

Which, for those with longer memories, is definitely reminiscent of reinsurance renewals in 2012/13, just at the start of the last significant softening.

Reinsurance capital providers of all kinds would do well to remember that, as it may signpost what giving away too much now could herald over the coming years.

The reinsurance market can be quick to slip back to its old ways, but this time we do feel a strong desire to protect capital. As if those deploying it don’t, capital may not prove very long-lasting.