Horizon risks including climate change and pandemics will reinforce hardening: Aon

Re/insurers are increasingly focused on longer-term risks such as climate change and pandemics, which is encouraging investors to demand higher returns and increasing the upward pressure on prices, according to Andy Marcell, global chief executive for reinsurance solutions at Aon.

Speaking at Aon’s Virtual Reinsurance Renewal Season press conference on September 9, Aon executives said the overall outlook for the re/insurance industry was good.

Marcell said: “I expect the January 1 renewal season to start earlier than usual and to be a very measured process.”

Colin Dutkiewicz, global head of life at Aon’s Reinsurance Solutions business, said the growth prospects for the re/insurance industry are “tremendously exciting” but stressed the importance of improving modelling capabilities, especially for COVID-19.

“It is clear that there are more losses to come.” Mike Van Slooten, Aon Reinsurance Solutions

While the industry had good models for pandemic risk, applying them in the context of a new virus and an unprecedented economic response had been very challenging, Dutkiewicz admitted.

Aon has been working hard to develop models to predict COVID-19’s impact on economic and social behaviour, he said, allowing the industry to provide better risk mitigation products to aid the economic recovery.

Aon executives agreed the capital markets will play an important role in helping re/insurers offer pandemic risk mitigation products, but said the industry needs to find the right way to package it.

It remains unclear what the loss metric is for pandemic risk, explained Dutkiewicz.

“If it is about life and health that is easy,” he said. “If we are looking at the knock-on effects, the economic lockdown and the impact on social behaviour, it is very difficult to produce a valid time series of data that will give investors comfort that it is not manipulatable.”

Once the industry has solved that problem it will be able to produce products to sell risk to the capital markets, he added.

Marcell admitted it will take time before the industry can be sure about the full extent of its exposure to COVID-19, but said he believed the estimates that have been provided so far have been “ethical and honest”.

Much will depend on how authorities rule in disputes over what is and is not covered by existing policies, said Mike Van Slooten, head of business intelligence for at Aon Reinsurance Solutions.

“All eyes are on the Financial Conduct Authority test case,” he said. “There is a lot that still needs to be worked through, but it is clear that there are more losses to come, and they will extend over a long period of time.”

Good news
The performance of insurance-linked securities (ILS) has been a particular bright spot for the industry. Volatility in the ILS market compared favourably with other asset classes between February and April, noted Paul Schultz, chief executive of Aon Securities, with prices falling by only around 1 percent, compared to around 20 percent for the S&P and 7 percent for hedge funds.

Schultz said many investors are attracted to ILS because it is non-correlated with other assets. This year had been the second opportunity since 2008 for ILS to back up that claim, and it had delivered, he said.

The current low interest rate environment will highlight the relatively strong performance of ILS compared to other fixed income products, Schultz added.

He predicted further growth for ILS, including new cyber products allowing companies to better manage risks such as ransomware and malware.

Schultz also pointed to renewed private equity interest in the re/insurance sector in recent months, especially in startups and other platforms.

“COVID-19 has not interrupted the M&A cycle, which will continue,” he said. “It may even have brought in fresh capital looking for new opportunities.”