After years of financial pain, the world’s reinsurers have managed to improve their balance sheets. John Carroll (pictured above) said global reinsurers’ 2023 financial results are “real positives for the industry.”
However, Aon’s CEO of Reinsurance Solutions in Australia and New Zealand also said a large portion of this positive news comes from shifting financial burdens to the world’s insurers.
For example, natural catastrophe losses. Despite a “relatively benign” hurricane season this year, Carroll said these losses still look likely to reach $100 billion in 2023.
“Importantly, what’s happened is that most of those losses have been borne by insurers and have not been transferred to the reinsurance market,” he said.
During a Financial Services Accountants Association (FSAA) webinar, Carroll – who has more than three decades of reinsurance industry experience – detailed the changing drivers behind the current hard insurance market and how reinsurers have responded.
Carroll started by going back to 2022.
“This time last year, the markets stood on the precipice of the first genuinely hard market for some time,” he said. “Results were improving following pricing corrections but the industry was looking at a six-year period of combined ratios averaging in excess of 100% and a return in equity of just under 6%.”
He said these returns were well below the estimated cost of capital. Underwriting results were also “relatively poor” and investment results were declining.
“What this meant was a reduction in available capital for the reinsurance industry,” he said.
There was also Hurricane Ian.
“Then, to cap it all off, in Q3 and Q4 last year, Hurricane Ian had just barrelled through the US as a $50 billion market loss,” said Carroll. “So the reinsurance market suddenly went into overdrive on remediation and corrective actions in light of what had been happening for six years and what was happening for them in the close of last year.”
While Hurricane Ian wasn’t the direct cause of the remedial action, Carroll suggested it was a significant reason why reinsurers took action when they did.
That action, said Carroll, was a result of six years of underperformance by reinsurers.
“We’ve charted their six-year average return on equity from 2017 to 2022,” he said.
The poor returns of leading markets, said Carroll, “was the real impetus for a major change in market terms and conditions leading into 2023.”
The question reinsurers were asking themselves, he said, “was whether the product they were offering was actually sustainable going forward.”
“So what people were seeing is that the rhetoric from reinsurers at the end of last year was that things need to change and the hard market is here to stay,” he said.
The Aon leader showed a colour slide with a snapshot of reinsurance renewals leading into 2023.
“Green is good if you like,” said Carroll. “There’s unfortunately not a lot of it – and even the green territories saw increases.”
In 2023 reinsurers’ remediation efforts began impacting insurers.
“What we saw through 2023 is that virtually every territory or region saw price increases in the reinsurance space,” said Carroll.
The United States, at January last year, he said, saw rate changes of 50% or more.
“That’s in addition to their retentions potentially doubling,” said Carroll.
Australia and New Zealand, he said, particularly during June and July this year, saw rate changes of 20% to 60%, with retentions also at 60%.
The UK meanwhile, he said, was an interesting case.
“They saw rates in excess of 35% increases and retentions up 50% but they actually haven’t had major loss activity for over 10 years,” said Carroll. “If you think about the US and Australia that have had a lot of loss activity, the UK caught the brunt of market remediation even though they were relatively loss free.”
Carroll compared the current drivers behind hard market capacity compared to 12 months ago. He said this assessment was relatively subjective but included drivers like catastrophe losses, inflation, results, capital availability and also feelings of uncertainty.
“Our general market view is that the outlook on all of these aspects has improved,” said Carroll. “The question is whether it’s enough to ease the market hardening.”
Loss activity, he said, continues to be dominated by weather perils.
“Over 70% of the world’s losses are US severe convective storm losses, as of this year because that number changes year on year,” said Carroll.
He said that “lends itself to uncertainty” about the future and ongoing climate change impacts.
However, he suggested that, overall, 2023 for reinsurers was a good year because of remediation work and “attachment points.”
“Importantly, the message here is that the majority of reinsurers are likely to meet investor expectations in 2023 and the industry is expected to exceed its cost of capital for the first time in a number of years,” said Carroll.
He said the half year combined ratio is tracking at about 90% with half-year return on equity at around 18%.
“But let’s not all go crazy about this,” said Carroll. “Nine months of positive returns is not going to wipe out the memory of six years of underperformance and we still do have concerns over the adequacy of reserves.”
He said the industry still needs to make “a really decent return on equity.”
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