Aon: Reinsurance demand to increase in 2016 with new growth opportunities

Aon Benfield, the global reinsurance intermediary and capital advisor of Aon plc, recently released the September 2015 edition of its Reinsurance Market Outlook report, which provides a comprehensive analysis of the key variables affecting reinsurance buyers as they approach Jan. 1 reinsurance renewals.

Reinsurance demand is projected to increase slightly in 2016 due to factors including updates to rating agency capital models, the continued privatization of reinsurable risks from government pools, and reinsurers’ expansion into new lines of business, according to the report.

In terms of business expansion, the report outlines areas of opportunity for insurers and reinsurers, including:

• U.S. mortgage risk—The transfer of credit default risk from government entities Fannie Mae and Freddie Mac to the insurance and reinsurance markets is presenting reinsurers with the opportunity to provide up to $6 billion of capacity annually for the next six to seven years.
• Annuity risk—Demand remains high for risk transfer solutions to mitigate exposures to long-term fixed, variable, equity indexed annuities, as well as other products with embedded guarantees.
• Privatization of risk—Government pools insuring catastrophe-exposed property are actively organizing depopulation programs, especially in Florida, and transferring risk on remaining catastrophe risks to the private markets.

Rating agency criteria changes

A significant increase in U.S. demand to date in 2015, the report says, particularly from Florida and other coastal risks, is likely to be bolstered by demand from rating agency criteria changes. A.M. Best will be releasing an update to their Best’s Capital Adequacy Model that is expected to result in many companies buying additional top-layer catastrophe protection as well as potential quota share and other risk-transfer products. Beginning in 2016, catastrophe-exposed carriers rated A- or higher will be held to 1 in 200 year all perils occurrence compared to current standards of a 1 in 100 wind or 1 in 250 earthquake. A+ rated carriers will be held to a 1 in 500 and A++ carriers will be held to a 1 in 1,000 standard. Importantly, all rated companies will have their capital adequacy metrics published at the 98%, 99%, 99.5%, 99.8% and 99.9% confidence intervals for the public to evaluate.

Although the criteria will not be fully effective in the U.S. until sometime in 2016, the report expects prudent carriers to begin adapting to the new standards with the Jan. 1 placements. A.M. Best will update global criteria to a similar standard following the U.S. rollout.

In terms of market dynamics, the report found that at the end of the second quarter of 2015, total global reinsurance capital had declined by 2% to $565 billion, down from $575 billion at the end of 2014. The decrease was credited in part to currency fluctuations—predominantly, the weakening of the euro against the U.S. dollar, higher bond yields impacting reinsurer bond investment market valuations, share repurchases and dividends.

[Related: Aon: Reinsurer capital hits record $575B]

Alternative capital

Alternative capital continued to grow in market share, contributing 12%, or $68 billion, to the total global capital figure at the end of Q2 2015. It is expected to increase to between $120 billion to $150 billion by the end of 2018 according to Aon Benfield forecasts. The alternative capital segment showed record levels of capacity from sidecars ($8.4 billion), industry loss warranties ($4 billion), and collateralized reinsurance ($32.5 billion), while catastrophe bond capacity contributed $23.5 billion to the total.

Bryon Ehrhart, chief executive officer of Aon Benfield Americas, said: “Reinsurance market dynamics in 2015 continue to provide our clients with very high quality options to source accretive underwriting capital—we expect these dynamics to remain through the upcoming 1 January 2016 renewal cycle.”

At the end of Q2 2015, insurer capital remained unchanged from year-end 2014, standing at $4.2 trillion.

The Reinsurance Market Outlook also highlights the mergers and acquisitions activity in the global insurance and reinsurance markets, which increased dramatically during 2015, with deal volume totaling $73.3 billion across 461 deals to Sept. 1, compared to $16.8 billion across 387 deals in the equivalent prior year period.

As of Sept. 1, global insured catastrophe losses had reached $16 billion—well below the historical 10-year average of $61 billion. Aon Benfield’s market outlook remains subject to the value of catastrophe losses occurring throughout the remainder of the year. Barring any major events, the firm expects reinsurer capital to continue to grow in the second half of 2015.

Read the full Reinsurance Market Outlook – September 2015.