Insurers Seek Risk Transfer Solutions to Offset Higher Retentions and Resume Growth

Insurers Seek Risk Transfer Solutions to Offset Higher Retentions and Resume Growth
May 21, 2024 9 mins

Insurers Seek Risk Transfer Solutions to Offset Higher Retentions and Resume Growth

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The challenges of 2023 eroded the buffers that many insurers had previously enjoyed, bringing an increased focus on capital management and a variety of capital sources according to Aon’s capital poll.

Key Takeaways
  1. 60 percent of companies would benefit from additional reinsurance to support growth
  2. 39 percent of respondents stated their companies feel pressure to increase capital; this is evidenced by 75 percent of companies experiencing a drop in BCAR over the last eight months
  3. Insurers responded that reinsurance and equity will be their primary future capital sources followed by third-party capital

With robust pricing levels in many primary insurance markets, and huge unmet need, the outlook for the insurance sector is looking more positive. But insurers are not out of the woods yet.

Although still adequately capitalized overall, the challenges of 2023 eroded the buffers that many insurers had previously enjoyed. Aon’s Capital Poll focused on insurers’ risk appetite, their need for additional capital, and their attitudes towards current and future capital sources. It reveals that a significant proportion are under pressure from stakeholders, including ratings agencies, to bolster capital. The poll also shows that the majority are now operating with higher retentions, resulting in increased earnings volatility.

As such, there is an increased focus on capital management with insurers reporting in Aon’s Capital Poll that they are exploring a variety of capital sources as demands on capital continue to evolve, and with attractive growth opportunities emerging.

Higher Retentions Led to Increased Volatility

Given the challenging reinsurance renewal of January 2023, many primary insurers have seen increases in retention levels: Nearly 70 percent of Aon’s Capital Poll respondents reported that their retentions increased for programs renewing in 2023. This has led to significant volatility in primary insurers’ results over the year, a situation not helped by natural catastrophe losses – which remained above the historical average in 2023. Severe convective storm (SCS) activity was particularly impactful, with Aon estimating that global SCS economic losses reached $94 billion that year.

Exhibit 1: Did you increase your reinsurance retentions during your 2023 renewal?

insurers-seek-risk-transfer-exhibit-1-reinsurance-retentions

Insurers Under Pressure to Boost Capital

Rating agencies have noted a significant divergence between the results of commercial and personal lines insurers. The excess and surplus lines segment has boosted the performance metrics of the commercial lines composite, while personal lines have faced difficulties reaching rate adequacy in light of regulatory hurdles. AM Best continues to have negative outlooks on the U.S. personal lines market segment, while S&P has an overall negative outlook on the entire U.S. property and casualty sector. Fitch has a neutral outlook on both segments but does not expect a return to profitability on the primary side until 2025. In June Moody’s moved to a stable outlook on personal lines as profitability improves with rate increases earning into results.

During 2023, there was a noted negative bias in ratings activity, with 12 percent of S&P ratings on a negative outlook compared to 6 percent positive, three downgrades and no upgrades. Meanwhile, in 2023 AM Best’s downgrades were double its upgrades1.

Exhibit 2: Ratings Outlooks
Line of Business AM Best Fitch S&P2 Moody’s
Personal Lines Negative Neutral Negative Stable
Commercial Lines Stable Neutral Negative Stable
Reinsurance Positive Improving Stable Stable

The divergence between commercial and personal lines writers can be seen in the results of Aon’s Capital Poll. Slightly under 40 percent of respondents reported they were feeling pressure to increase capital levels from a variety of stakeholders. While the industry overall remained adequately capitalized, capital metrics deteriorated, especially for regional insurers. Companies faced not only investment volatility, but also elevated insured losses from natural catastrophe events in 2023.

Exhibit 3: Are you feeling pressure to increase your capital level from rating agencies, regulators, investors or internally to achieve sufficient returns?

insurers-seek-risk-transfer-exhibit-1-reinsurance-retentions

On the rating agency side, Aon has seen a notable erosion in insurers’ capital buffers as assessed by AM Best’s Capital Adequacy Ratio (BCAR) score. Between August 2023 and March 2024 AM Best updated 316 rating units, of which more than 75 percent experienced a decline in their BCAR. Changes to AM Best’s balance sheet strength assessment, linked to BCAR declines, were among the leading triggers for negative rating action from the rating agency in 2023. Aon expects that access to diverse sources of capital will be an area of rating agency focus in 2024.

Exhibit 4: BCAR score changes for 316 rating units

insurers-seek-risk-transfer-exhibit-1-reinsurance-retentions

Additional Capital to Supporting Growth Opportunities

Aside from revealing that some insurers intend to shore-up balance sheets to improve financial strength ratings, the Capital Poll asked respondents whether additional capital would help them to meet growth targets. Sixty percent of respondents indicated that their company would materially benefit from additional capital to support growth opportunities. Although profitability for many primary insurers was below their cost of capital in 2023, disciplined underwriting is expected to continue, and companies are seeking opportunities to take advantage of compounding rate increases.

Exhibit 5: To support your company’s growth, both organic and inorganic, would you materially benefit from additional capital?

insurers-seek-risk-transfer-exhibit-1-reinsurance-retentions

Quote icon

Insurers face a challenging balancing act, given higher retentions and elevated reinsurance costs, while maintaining rating agency capital adequacy benchmarks – all the while, not missing out on the opportunity to grow in today’s market.

Pat Matthews
US Head of Capital Advisory, United States

Reinsurance Viewed as Top Source of Capital

The Capital Poll highlighted that Reinsurance (60 percent) was the most common source of capital used by respondents, followed by equity (41 percent) as respondents could select multiple capital forms. Given the higher retentions experienced on the primary side throughout 2023, it is not surprising that insurers would seek to cover those gaps when possible. Meanwhile, alternative reinsurance capital surpassed USD100 billion in 2023, with insurers engaging with third-party investors for additional capacity.

Exhibit 6: What forms of capital did you use in 2023?

insurers-seek-risk-transfer-exhibit-1-reinsurance-retentions

Reinsurance (56 percent) and equity (32 percent) were also shown to be the primary future capital sources selected by respondents, followed by third-party capital. The lower level of interest in future legacy solutions may change given reserve development trends experienced in 2023 and that reserve strengthening on liability lines, driven by social inflation, is a continuing area of concern in 2024.

Exhibit 7: What forms of capital are you exploring in 2024?

insurers-seek-risk-transfer-exhibit-1-reinsurance-retentions

Delivering Capital Solutions to Insurers

The results of the Capital Poll confirm Aon’s strategic approach to bringing a range of new capital sources and solutions to insurers. Throughout 2023 and into 2024, Aon has made it a priority to deliver greater volumes of capital globally, helping insurers reduce reported volatility, and build business resilience – particularly when faced with rating agency action. This additional capital has served to strengthen their position in the marketplace, liberating insurers from balance sheet constraints and allowing for better business decisions.

About Aon’s Capital Poll

In the second half of 2023, Aon surveyed attendees at key industry conferences in the U.S., Europe and Asia Pacific to elucidate the industry’s approach towards capital utilization globally. With more than 200 respondents, Aon’s Capital Poll focused on companies’ risk appetite, their need for additional capital, and their attitudes towards current and future capital sources.

1 S&P Global Ratings, U.S. Property/Casualty Insurance Sector View 2024, Jan 31. 2024.
2 S&P has an overall negative outlook on the US P&C segment.

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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