Abundant capital gives European buyers room to improve protection – Aon’s Esser

Abundant capital is creating room for better protection, from restored frequency cover to wider access to hybrid capital for regional and mutual insurers, Aon’s Phillip Esser tells Baden-Baden Today.

Key points:
Buyers look beyond rate cuts
Hybrid capital could reach smaller insurers
Structures should survive the market cycle

Several years of strong reinsurance results have left the European market with capacity to deploy just as demand for additional top-layer protection is slowing. Rather than simply use that imbalance to push down prices, Phillip Esser sees an opportunity for insurers to improve protection, restore cover lost during the hard market and broaden access to capital traditionally easier for the largest buyers to reach.

Speaking in one of his first interviews since becoming CEO of Reinsurance Solutions Germany at Aon, Esser told Baden-Baden Today: “There is plenty of capacity in the market. The question now is how we as an industry – and how buyers – can make the best use of that abundance.”

Across continental Europe, Esser says supply is growing faster than demand. Inflation has eased, economic growth has slowed and many insurers remain well capitalised, reducing the need for further top-layer catastrophe capacity.

That is giving buyers more room to consider how existing programmes are structured.

“There are two options we are discussing: price reductions on current structures, or improving coverage by reducing retentions and restoring features lost during the hard market phase,” he said. “clients are more frequently exploring coverage improvements rather than simple rate cuts.”

Wider access

Esser sees another opportunity in extending newer sources of capital beyond the global insurers traditionally best placed to access them.

“We do see ever more investors in hybrid capital coming into the market, and of course, it’s now our task to see how we can make that accessible for our clients,” he said. “And I’m not speaking only about the big global clients, but also clients that are on a mutual side or rather smaller.”

That includes regional and public law insurers in Germany, where hybrid and alternative capital could complement traditional reinsurance and help address protection gaps.

Germany’s elemental perils gap is one example. “We have a great opportunity to use the capital we have in the insurance and alternative market and make it available for clients and insured people in the end,” he said.

“What we want is consistency and reliability across the cycle.”

Cover returns

More familiar forms of protection are also returning to buying discussions. Higher attachment points during the hard market left primary insurers retaining more frequent losses, while some sideways and frequency covers became difficult to place.

“Clients weren’t able to place the structures they wanted to cover frequency losses,” Esser said.

Claims inflation and rising loss costs are increasing interest in aggregates, stop-loss treaties, excess-of-loss structures with annual aggregate deductibles and other structured solutions.

“We see more and more clients now, given the claims inflation, given the rising loss costs, looking steadily into these covers,” he said.

The aim is to reduce earnings volatility rather than simply add capacity.

Secondary perils are also taking a greater share of those conversations. Severe convective storms, flood, hail and wildfire feature far more prominently than a decade ago, while modelling is evolving around risks with less historical experience.

“The discussions we have with our clients have become increasingly technical and sophisticated when it comes to the hazard models,” he said.

Better data and analytics are helping insurers and reinsurers assess those exposures more quickly, but Esser does not see technology replacing underwriting experience.

“The simple use of AI doesn’t make you a better underwriter,” he said. “We still need to combine the positive impact of AI with the experience of the underwriters, the claims analysts, managers and brokers.”

Built to last

Greater choice in a softening market also raises a longer-term question over whether structures agreed today will remain viable when conditions change.

Esser said buyers have little appetite for programmes that need to be substantially redesigned every two or three years as the cycle turns. “What we want is consistency and reliability across the cycle,” he said.

Aon is therefore discussing structures that improve protection in current conditions without depending on today’s level of capacity or competition remaining in place.

“Together with our clients we are trying now to find structures that we put into place in a softening market, but that are also capable of sustaining and surviving in any hard market phase that could come up,” Esser said.

Early discussions between cedants, brokers and reinsurers will be important if those structures are to meet buyer needs without becoming unsustainable once conditions tighten. “Let’s work together to create structures, solutions and relationships that can sustain the cycles,” he said. 

Phillip Esser is CEO of Reinsurance Solutions Germany at Aon, and can be contacted at phillip.esser@aon.com.

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