2023 will be the year of the retained loss: Aon

2023 will be remembered as the year of the retained loss. Changes in attachment points made in last year’s renewal combined with the nature of insurers losses generally this year have left insurers bearing the brunt of losses.

That is the view of Dan Dick, executive managing director in  Aon’s Reinsurance Solutions group, leading the group’s Global Catastrophe Management Practice. He told APCIA that it has been an unusual year for losses.

He notes that Storm Ciarán, which hit the UK and France last week, was the 31st insured loss globally of more than $1 billion in 2023. Yet there have been no losses higher than $7 billion, leaving reinsurers unscathed, but insurers counting the cost. “Reinsurance typically kicks in upwards of $10 billion,” Dick said.

But this dynamic could prompt insurers and reinsurers to re-examine attachment points.

“We are expecting a more orderly renewal than last year; it seems the expectations of everyone are pretty clear and there will be some thoughtful conversations about things such as attachment points.

“The price and the willingness has to be there but this will be a discussion point. Retained volatility will certainly be a talking point at APCIA.”

Climate and cat

Any changes will be nuanced, with reinsurers remaining disciplined. While Dick acknowledges that some new capital has entered the industry, he said he had seen no evidence yet of it putting any pressure on pricing or terms and conditions. The possible exception to this, he states, could be in the upper cat layers where ILS capacity remains robust.

“ILS investors are still looking at these layers and it could be a case of ‘use it or lose it’ with them,” he said. “That could cause some pressure on the top layers.”

A related talking point at the conference will be around how climate change fits into the picture of catastrophe risk—to what extent it is driving losses, as opposed to other factors such as the inflation of insured values and the aggregation of risk.

Dick said that some perils such as severe convective storms in the US, responsible for more than $50 billion of losses this year already, are bringing this subject to the fore.

This ties into another potential talking point: on the reliability and performance of risk models. He notes that Hurricane Ian last year tested the models in a number of ways—and they performed well. “But there are always lessons to learn,” he said.

He notes that Hurricane Otis, which hit Mexico as a category 5 storm, will be the subject of debate. The storm intensified very quickly and late, meaning some have questioned the risk models.

Dick argues that the discussion should be more nuanced. He said that, while the late intensification was surprising, it was not something that had never been seen before by weather models.

Equally, the risk models the insurance industry uses model the possibility of a category 5 hurricane hitting Mexico. “The event overall was not a surprise. Its rapid change from a category 1 to 5 was surprising and unusual but, again, we have seen that before.”

On his perspective on California, where a mixture of cat losses and regulation have made conditions tough for insurers, Dick notes that wildfire risk in particular is a complex risk in the state, as the regulator looks to balance the interests of consumers with those of insurers.

Dick recognises there is a healthy debate around whether to allow insurers to use risk models for wildfire risk—which they are not currently allowed to do. But he accepts that dealing with this risk is best managed at a community level, with mitigation and preparation critical to managing it.

“We know the state is trying to find solutions to what is a complex problem” he said. “They don’t necessarily want insurers using what they see as a black box to price risk, but it is difficult for the industry if they can only look backwards at events that have happened in the past. Your view in a rear-view mirror is limited.

“They need to understand the potential risks and losses in the future. If they cannot do that, and they cannot price in their reinsurance and increased aggregation exposures, they will have to make business decisions.

“Maybe some will rebalance their portfolios. But that is why risk models could help the state and insurers better understand and manage those risks.”

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