Reinsurance market stability signals more moderate outlook for commercial lines in 2024

The relevance of the reinsurance market to the commercial risk space was painfully clear over the past 12 months. The resetting of the property catastrophe reinsurance market in early 2023 drove up property insurance rates and led to some scarcity of capacity for commercial insureds with natural catastrophe exposures. This contributed to stronger demand for alternative solutions as large commercial buyers sought out various forms of risk capital to satisfy their unmet needs.

Reinsurance reset brings stability

Following the resetting of property catastrophe pricing and retentions a year ago, the reinsurance market was, thankfully, more moderate at January 1, 2024. According to Aon’s latest Reinsurance Market Dynamics report, the January reinsurance renewals proceeded ‘relatively smoothly’, as a rebound in reinsurer profitability and capital, as well as greater availability of retrocession capacity, led to ample capacity to meet demand. This was a marked change from a year ago. In fact, to a limited degree this ample supply of property catastrophe reinsurance capacity led to a competitive environment for peak perils and upper layers of reinsurance programs, especially for global and large U.S. insurers. However, there was mild upward pressure on reinsurance pricing for exposures in the EMEA region, especially in areas with ceded loss activity in 2023, such as Italy, Greece, Norway, Slovenia and Turkey.

Casualty treaty renewals were buoyed by rate hikes in primary insurer casualty pricing and increased interest rates that benefit long tail underwriting. However, concerns for prior-year reserve deterioration and adverse litigation trends led several reinsurers to be vocal about the need for reinsurance price increases for US casualty. The main concern outside of the US was international general liability policies containing US exposures.

More moderate outlook for commercial lines

2024 should be mostly a year of relative moderation for commercial lines risks with one noteworthy exception. We anticipate:

• Property insurance pricing to experience single digit increases, largely to keep pace with inflation.

• Property catastrophe capacity may be easier to secure in 2024 than in 2023.

• Strikes, riots and civil commotions cover may be reinstated in property covers.

• D&O, Professional Lines and Cyber will continue to see rate decreases in the single and low double digits.

• Casualty insurance pricing, particularly US Auto and Umbrella will likely be challenging with many risks likely to see double digit rate increases and increased Umbrella attachment points   as insurers respond to adverse litigation trends.

Driving differentiation

Reinsurance renewal discussions were focused on insurers differentiating themselves in their underwriting. In other words, despite the relative stability of renewals there was still considerable underwriting rigor displayed. This underwriting discipline and pursuit of differentiated risks will filter through to insureds who can differentiate themselves with better quality data. This is where commercial clients can leverage analytics to unlock capital.

Ample capacity… for now

We’re compelled to point out that despite the relative moderation of the January 1 Treaty Renewal season, it was clear that demand for reinsurance was robust due to an erosion in insurance capital from natural catastrophe losses. According to Aon’s Impact Forecasting team, insured losses in 2023 again exceeded $100 billion, with severe convective storms accounting for almost two-thirds of the annual total. Fortunately, these elevated natural catastrophe losses were countered by strong reinsurance capital supply: Aon estimates that total global reinsurance capital rose by $45 billion to $635 billion at the nine-month point.

That said, the reinsurance market continues to face uncertainty around the impact of climate change, inflation, litigation funding, and geopolitical risk on ultimate loss costs. These unknowns are creating headwinds to new investment, despite the expectation that most reinsurers will have easily covered their cost of capital in 2023. And while the reinsurance sector is viewed as well capitalized relative to the risk currently being assumed, much more capital will be required if current unmet needs are to be addressed over time.

Alternative solutions for commercial risks

Large and mid-sized companies and captives are looking at all options and forms of capital, including reinsurance and alternative capital. In the past, commercial risk clients were just exploring alternative solutions like catastrophe bonds and parametric triggers, but in the current environment, they are now buying.

Parametric insurance, in particular, continues to gain traction, providing a solution for risks that are not readily covered in the insurance marketplace. While still a small part of the commercial risk landscape, these alternative products have caught the interest of C-suite officers and risk managers because of their flexibility, and fast settlement – parametric contracts typically pay out in less than seven days once triggered.

Satisfying unmet needs  

In an environment of increasing values and continued growth in large corporate exposures there is increasing potential for the reinsurance and alternative capital markets to help satisfy the unmet needs of commercial insureds.

Aon’s Risk Capital team has uniquely brought together insurance, reinsurance, capital market securities broking and analytics expertise for the benefit of our commercial risk clients. That team is engaging with commercial risk clients and reinsurance and capital markets to find solutions to current and future risks, including natural catastrophe risk, supply chain risk, climate change and transition risks, and cyber and artificial intelligence risks. Aon has identified 10 transformative trends that will shape the future risk landscape by 2030.

There is an increasingly broad range of investors interested in risk. As commercial clients look for efficient capital to make better decisions, they can reap the benefits of risk transfer options, regardless of the market, geography or instrument. Aon Risk Capital has broken down the traditional industry silos to access all sources of capital to meet the changing needs of businesses.

This article was co-authored by me and Aon’s Global Chief Broking Officer, Cynthia Beveridge.