Reinsurance & third-party capital are key growth levers for insurers: Aon

After capital buffers were eroded for insurers in 2023, a renewed focus on reinsurance as a capital management and growth lever has emerged, while broker Aon says that reinsurance capital and third-party capital are expected to be two of the three main capital tools utilised in future.

Aon polls insurers on their use of capital each year and in 2024 has found that reinsurance capital is top of the table, when it comes to capital sources for the sector.

In fact, reinsurance capital is now seen as so important for the insurance sector that some 60% of companies are deemed likely to benefit from additional reinsurance to support future growth, Aon says.

Respondents to the poll are feeling under pressure to increase their capital as well, while at the same time they are honing their sights in on sources of reinsurance (traditional and alternative) and equity building as their main levers for the future.

The outlook for the insurance industry is positive, Aon deems, given the robust pricing in many markets and huge unmet need.

But after the erosion of their capital buffers in 2023, insurers haven’t all been able to take advantage, leading to capital management becoming ever more important.

On insurers, Aon says that, “a significant proportion are under pressure from stakeholders, including ratings agencies, to bolster capital.”

Given their higher retentions, after the reset upwards in the reinsurance market, insurers are holding onto more volatility as well.

All of which is raising the importance of efficient use and management of capital, while raising the profile of reinsurance and third-party capital.

“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,” explained Pat Matthews, Head of Americas Capital Advisory, Aon.

Most insurers had to increase their reinsurance retentions at renewals over the last two years and with pressure felt on capital, with many insurers saying they feel compelled to increase it, reinsurance is clearly in focus.

Aon said that, “Sixty percent of respondents indicated that their company would materially benefit from additional capital to support growth opportunities.”

In fact 46% of respondents to Aon’s poll said they believe they would “materially benefit” from additional capital to support growth.

Aon’s poll identified reinsurance as the most common form of capital used by insurers, perhaps no surprise.

Equity came next and third-party capital came in at fifth, for forms of capital used in 2023, after legacy and reserve risk solutions, and captive, reciprocals or other corporate structures.

However, when asked what their primary future sources of capital would be, insurers elevated third-party capital up to third, again behind reinsurance in first and equity capital in second.

Telling is the fact insurers cite reinsurance capital as the key form of capital that can help to drive growth for them.

As third-party capital can typically be utilised in reinsurance form, that is also a lever for growth for primary insurers.

This also speaks to the quota share and there is a good chance quota share based ILS solutions could become increasingly in-demand, but also increasingly integral to insurer capital arrangements.

As the global insurance and reinsurance industry undergoes a long overdue reimagining of its capital stack, third-party capital in efficient forms, that can move in and out, responding to changes in demand, could become increasingly attractive and so help to drive further alternative capital and ILS market growth, we believe.