Reinsurance rates are likely to continue rising in the upcoming January renewals, with low interest rates a major driver, Aon Reinsurance Solutions CEO Andy Marcell said during a fireside chat with Insurance Insider.
Rate momentum on catastrophe cover has gathered paced in recent years, while with casualty lines, where proportional reinsurance is more dominant, carriers have been driving rates and adjusting terms and conditions, the CEO noted.
At this point, cedants and reinsurers are expecting these trends to continue into next year, Marcell said.
“There’s a reality of what’s happened in the marketplace and it’s not singularly loss-driven. There’s an economic backdrop when you think about the decline in interest rates that no-one thought could decline further, but they have,” he said.
One indicator of the market environment – 30-year bonds – have declined and the outlook for recovery is “not positive”, he commented.
At the same time, the overall returns reinsurers can make have diminished amid the appearance of pandemic claims and concerns over global economic growth.
“A lot of these factors are playing in,” Marcell said. “The dynamics that are driving rate change at insurance companies are not exactly the same, but they’re almost the same as [those] driving the need for reinsurers to get higher returns.
“If you have two counterparties that are experiencing the same impetus for driving rates, there’s not going to be resentment. It’ll be an expectation that the product that they’re buying will be more expensive.”
In his view, while upward price movement is likely in the upcoming renewals, market signals point to limited increases.
“I don’t think it’ll be dramatic,” Marcell said. “In the end, cooler heads will prevail and the reinsurance intermediaries will do their jobs, and both sides will walk away with renewals complete on time and there’ll be a degree of satisfaction.”
After those rates are agreed, however, the insurance industry will have to weather the challenges that beset it related to the Covid-19 pandemic and the potential for trapped capital in the risk chain, Marcell said.
While carriers have already begun excluding pandemics from their covers, specific segments such as retrocession may require a more nuanced approach to identifying and managing losses, he said.
“When you have a situation where a pandemic is driving loss, quantifying that loss is incredibly difficult and releasing capital is not something that the counterparties want to do,” the CEO added. “People are going to want to know what it is that they’re covering in the original policies.
“Whether it’s all perils going to more named perils, and maybe instead of broad-brush retro programmes, they’ll be more bespoke around segments of the marketplace. I think that’s where you’ll see terms and conditions and more precision around what people are buying.”
Looking ahead, in general, reinsurers will need to keep an eye on expenses, but tools such as Aon’s ABConnect placement platform can help, according to Marcell.
“There’s an expense challenge in getting an original policy to an insurance company and then to a reinsurer,” he said.
“The broker to the insurer – that’s an expense outcome that can be improved by technology and I think capitalism is taking that on, whether it’s Aon’s investment in platforms like CoverWallet or whether it’s the increasing optionality for InsurTech in personal lines.”
From a reinsurance standpoint, if a broker can cut transaction costs and improve transparency, customers will benefit, he concluded. “That cost saving would be in theory returned to our customers because the cost of doing business with the reinsurers would be reduced.”
To view this discussion and other (Re)Connect sessions on demand for free, click here.