Softening of capacity constraints could bring an ‘orderly’ reinsurance renewals in 2024

Aon forecasts reinsurers to have a strong performance in 2023.

The January 2024 renewals are expected to be more orderly compared to the previous year, with supply and demand balanced, Aon said. 

Following the reset in property catastrophe pricing and retention levels in January 2023, subsequent renewals in April, June, and July became more predictable as reinsurers re-established their risk appetite and insurers adapted to market changes. 

Capacity has grown steadily in 2023, with capital flowing in from third-party investors and the insurance-linked securities (ILS) market rebounding. 

Global reinsurer capital increased by 10.7% to $620b since third-quarter (Q3) 2022, driven by retained earnings, recovering asset values, and new investments in catastrophe bonds.

Reinsurers are better positioned for the 1 January renewal, with rate adequacy and strong investment returns improving H1 2023 results despite higher natural catastrophe losses. 

Reinsurers maintained discipline despite two-quarters of higher returns, as investors sought sustained performance. While capacity meets current demand, various market sub-sectors are at different stages of the cycle, potentially leading to capacity constraints in some loss-affected areas.

Reinsurers are increasingly interested in the property catastrophe business, especially in middle to higher layers, although challenges persist in placing lower layers. The casualty reinsurance market remains attractive due to rate stability and improved investment returns, despite economic and social inflation concerns.

ALSO READ: Aon appoints new head of construction and infrastructure for Asia

Natural catastrophe frequency remained high in H1 2023, particularly from secondary perils. 

However, reinsurers' results in the same period suggest they have distanced themselves from frequency losses and secondary perils. 

Ceded losses have decreased due to retention increases and less aggregate catastrophe protection, allowing the sector to absorb larger losses while maintaining returns.

As market stability returns, reinsurers and insurers have an opportunity to collaborate effectively, reward pragmatism, and use data analytics to optimize reinsurance arrangements. Focusing on certainty, consistent terms, and conditions can benefit both parties.

Reinsurers are poised for a more orderly and profitable market in the upcoming renewal season. Capital has grown, and the sector has demonstrated resilience, with positive returns despite challenges. Collaboration and innovative reinsurance strategies can further strengthen the industry.

Unless there is a significant loss later this year, most reinsurers are expected to have a strong performance in 2023, bolstering the capital of existing players and possibly attracting new entrants in 2024.

If the retrocession market remains stable, there could be a slight relaxation of current capacity limitations during upcoming renewals. However, caution regarding secondary perils is likely to ensure disciplined approaches in lower-tier programs for the foreseeable future.