Reinsurers still keen to grow casualty portfolios: Aon

Market conditions in casualty may be better than last year but challenges around lower rates for directors and officers (D&O) remain, say Nigel Light, global casualty leader at  Aon’s Reinsurance Solutions and Amanda Lyons, US strategic growth leader for casualty at Aon’s Reinsurance Solutions.

The two leaders discuss available capacity for casualty insurers and what reinsurers plan to do with their casualty portfolios as the industry meets in Monte Carlo.

What trends are you seeing as we approach the 1/1 renewal?

“The D&O segment is now approaching an inflection point.” Nigel Light, Aon’s Reinsurance Solutions
The casualty reinsurance market is stable ahead of the January 1, 2024 renewal having seen clear improvements in the dynamics compared to 12 months ago. There is now sufficient capacity across almost all major lines of business, and while pockets of the market remain challenging, and although D&O rate reductions are still very much in focus, the reality remains that underlying casualty rates are broadly very healthy.

If we were to examine the market more granularly, then large international towers are seen to be under more pressure due to reinsurers’ concerns about embedded US exposures and the accompanying volatility of large losses. But overall, casualty insurers should find ample capacity for their current needs at renewals, with many reinsurers still keen to grow their casualty portfolios and support long-tail lines of business.

Reinsurers continue to display underwriting discipline given their continued inflation concerns and the moderation we have seen in underlying rate increases, relative to last year.

You flagged D&O as an outlier; can you provide more detail?

“Capital for legacy reinsurers has more than tripled over the past six years.” Amanda Lyons, Aon’s Reinsurance Solutions
Ceding commissions and capacity in the professional liability market in general came under increased pressure at the mid-year 2023 renewals, and this trend was particularly evident in the D&O market, where rates have been steadily decreasing from their first quarter 2022 peak.

According to Aon’s Quarterly D&O Pricing Index, D&O pricing decreased in Q2 2023 by 26.8 percent year on year. This represented its fifth consecutive quarter of reductions, and we believe that the D&O segment is now approaching an inflection point for original pricing and the reinsurance market.

How does the casualty situation compare to the challenges seen in the property market?

The impact of higher interest rates in major casualty markets are a big positive for ongoing supply. Compared with property lines, casualty re/insurance benefits significantly from higher interest rates, which generate higher investment returns earned on long tail business.

These improvements in investment returns should strengthen insurer negotiations with reinsurers during the renewals period, and support retention levels.

Are there any trends in the way casualty programmes are being structured?

Reinsurers are favouring traditional reinsurance structures, and are seeking to maintain or improve their current margins on excess of loss business.
Further changes in quota share commissions, either increases or decreases, will be related to 2022/2023 risk-adjusted rate change achievements and prior-year results.

What areas will be under discussion by casualty insurers and reinsurers during the Rendez-Vous?

Key topics will be inflation, investment income, rate change and prior-year loss development—with respect to the latter, especially on the underwriting years 2015 to 2019.

In terms of inflation, casualty insurers continue to face elevated severity from economic inflation compared to historical levels, but the impact is much lower compared to last year’s renewal.

Social inflation continues to impact the casualty class in particular, including the continuation of jury-led nuclear verdicts. However, liability insurers are proactively addressing the impact of inflation on their portfolios in their presentations to reinsurers, as well as in underlying pricing. This is an area that will remain closely watched by reinsurers.

Do you see growth opportunities in the casualty space?

Demand for adverse development and other legacy products will continue to grow and provide insurers and reinsurers with attractive opportunities in the challenging property-catastrophe reinsurance environment.

In contrast to many other lines of business, which have seen low or no capital growth, capital for legacy reinsurers has more than tripled over the past six years, from $6 billion to $20 billion. This increased capital supply, coupled with rising interest rates, makes the pricing on legacy deals more attractive than ever.

The legacy markets are therefore very robust, with many insurers already taking advantage of the conditions and redeploying their capital into the currently well-priced casualty markets.

We believe that any insurers not investigating the potential benefits of legacy transactions run the risk of prior-year loss emergence, which could damage future results and cause them to be outliers relative to peers.

To provide an indication of the potential size of this market, Aon expects that legacy capital can fuel growth in deals placed to $10 billion in annual gross premiums.

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