Cat bonds the top Aon recommendation for property insurers at year-end

With the fourth-quarter of the year an important time for the property insurance market, not least as the peak reinsurance renewal season approaches, broking giant Aon has made considering catastrophe bonds the top recommendation for insurers looking to navigate what can be a challenging time.

Aon’s latest global insurance market insights report highlights alternative capital solutions as a key lever for clients seeking to smooth their year-end experience.

As it looks ahead to the 2024 renewals, Aon believes that nat cat reinsurance pricing is set to remain elevated, despite some increases in capital levels across the industry.

Capital increases in reinsurance have been largely driven by retained earnings, recovering asset values and new inflows to the cat bond market, Aon explained.

Meanwhile, traditional reinsurers’ underwriting and operating returns have improved year-to-date, on the back of rising insurer rates and portfolio retentions, tighter peril definitions in reinsurance terms and conditions, and improved investment income.

Meanwhile, Aon also believes that reinsurers are now shifting their focus back to social inflation, as economic inflation begins to cool.

All of which means the reinsurance market has adopted a “highly disciplined and rigorous Nat Cat underwriting approach”, Aon said.

Some additional reinsurance capacity supply is getting offered, but based on a flight to quality, the broking group noted.

Leaving reinsurers “cautious, but responsive” to primary insurer needs for frequency coverage as the 2024 renewal season fast-approaches, Aon said.

Insurers are facing a wealth of challenges to their relevance and business models, Aon notes, from how to address underinsurance, geopolitical risks, and supply-chain risk and contingent business interruption.

The state of the reinsurance market at year-end is seen as an additional factor and while it is expected to be easier for insurers, Aon provides some advice to clients on how to get the best results at year-end.

Top of these is a recommendation to consider alternative capital solutions, such as the catastrophe bond market.

It’s notable this gets such high billing this year, as the cat bond market is being seen increasingly as a source of efficient reinsurance capacity that is ready to respond to insurers needs.

Other recommendations from Aon include, portfolio differentiation with a custom view of risk and strong data, directly addressing reinsurer concerns on inflationary impacts, using market data to guide placement decisions, and measuring and quantifying the rating agency impact of reinsurance program or structure changes.

With the cat bond market pipeline already swelling with issuances, there are 15 cat bonds in the market and waiting to either be priced or settle right now, there may be some questions as to how many the market can absorb by year-end.

But the cat bond market is usually active into the first-quarter as well and insurers would do well to consider how they can seal their traditional reinsurance needs at year-end, while looking to the cat bond market for higher-layers through January and into February, or beyond, as well.

Brokers, like Aon, are pushing the cat bond market as a source of capacity that can help insurers navigating challenging renewals this year, given the demand for cover seems to be rising in areas of the reinsurance tower where cat bonds can be most efficient, while traditional reinsurers are more willing to help out at levels where the cat bond market is more reticent to deploy its capital.

All of this driving multiple new sponsors to the cat bond market in 2023 and given the recommendations from brokers, such as Aon, we’re expecting this elevated cat bond market activity to persist into 2024 as well.