Aon’s Marcell: Stable 1.1 cat market expected amid increasing competition

Absent any major cat events between now and 1 January, Aon’s newly appointed CEO of Risk Capital Andy Marcell expects a significantly more orderly renewal as he suggested increased competition among reinsurers to deploy capacity could put downwards pressure on pricing for some buyers.

In a wide-ranging interview with The Insurer, the executive also talked about addressing the coverage crisis in places like California; harnessing capabilities to meet the evolving and complex needs of corporate insureds; the retro market; intellectual property opportunities and the talent war.

Summarising his outlook for the 1 January renewal, Marcell said: “Following a period of market challenges, there are currently no factors placing significant upwards pressure on reinsurance rates. But at the same time, capital is not entering in large volumes and greater limits will be sought by insurers, so there won’t be a huge softening.

“When we look at Aon’s cat portfolio we see rate adequacy – the internal rate of return on capital for reinsurers at 1-in-250 for example looks pretty strong.”

Marcell, who also remains CEO of Aon’s Reinsurance Solutions division pending the appointment of a successor, noted that while the rate hardening may have made the headlines, it was the structural change to cat programs that was most significant, along with sourcing capacity for secondary perils.

He added that after a challenging and at times chaotic 1 January renewal, a much more orderly market has emerged with a flight to quality in the minds of reinsurers towards the insurers they deem to be preferred partners.

“Given the talk of a flight to quality, there was still plenty of capacity – it was more than adequate to satisfy the needs of most of our clients, and some of those buying protection at 1 January bought additional coverage through the year.

“Reinsurers will now be competing to reinsure a preferred partner, and this may result in some downwards pressure on rates,” Marcell suggested.

He predicted that mitigating any downward pressure will be increased limit purchasing of between 5 percent and 10 percent on average for the US and Europe, as well as private transactions that allow some cedants to “optimise” capital lower down to counter the impact of higher retentions on core cat programs.

While there may be some further incremental traditional capital entering the cat space, it will not be sufficient to dramatically change supply and demand dynamics, Marcell suggested.

He also said he does not expect a significant expansion of the retro market, noting that some big users of the product such as Lloyd’s syndicates had demonstrated they can operate with significantly less retro than previously purchased with the help of portfolio management technology and tools alongside better-structured cat programs.

But the impact on buyers of a hard traditional reinsurance market has been partially offset by a return to strong supply of ILS capacity for cat bond transactions, with the market on course for record issuance levels this year.

That represents a dramatic shift from late last year, when placing cat bonds of a relatively modest $250mn size was challenging.

“ILS pricing has decreased to pre-Ian levels due to cat bonds proving themselves as a mechanism that can deal with tail risk, and performing in line with cedant and investor expectations.

“We have helped many clients to navigate potential volatility and find efficiency in buying major limit through incorporating alternative capital into their risk transfer strategies. This has the effect of reducing the stress on their cat programs and transferring risk at stabilised prices, and I think it will continue,” said the executive.

Robust US casualty market

Another feature of 2023 has been downward movement on cede commissions on casualty quota shares.

But outside D&O, Marcell said he expects the casualty market to be relatively stable at the upcoming renewals, as he pointed to the health of the underlying business.

“If you look at US casualty, the market is quite robust. Not everyone shares that view, but from my perspective it seems to me that it’s a relatively good time to be an insurance company in the US. If you’re a reinsurer and a lot of your transactions are proportional – which they are in casualty – there are a lot of tailwinds driving performance,” he commented.

The executive said he expects reinsurers to push for lower cedes, with their case built around reserve development, potential frequency and severity, the performance of old years and whether there is pricing adequacy, saying they need to assume the risk at lower acquisition costs for them.

“I am not sure that any reinsurer concerns have been evidenced in the financial performance of insurance companies over the past eight months. So I would expect the market to be reasonably stable, aside from D&O coverage, which is a much more challenging marketplace because of the precipitous drop in rates,” Marcell suggested.

The California issue

A further trend this year has been the retrenchment of a number of large US insurers from some cat-exposed states, most notably California’s admitted personal lines market.

In his new role, Marcell is overseeing Aon’s commercial risk and reinsurance businesses, as well as the creation of a unified risk analytics team in the Risk Capital division to help create new capacity for risks like climate and cyber.

The aim is to increase collaboration and coordination across the firm to bring capabilities to clients in a way that serves the needs of each individual client.

“Aon is striving to deliver agnostic access to capital for its insurer and corporate clients. This creates greater efficiency in the marketplace and helps clients to maintain business resilience when faced with operational headwinds. It also provides clients with more strategic options, ultimately driving better business decisions,” Marcell explained.

Commenting on Aon’s potential role in bringing solutions and capacity to places like California where carriers are retrenching, the executive suggested the key is to provide a better understanding of the risk.

“To attract capital to risk requires advanced data and analytics. How else can we quantify the cumulative probability of various outcomes and then segment that analysis into return periods which allow insurers and reinsurers to allocate a certain amount of capital to that risk?” he added.

Marcell highlighted the firm’s in-house Impact Forecasting modelling capabilities, which have been obtaining licences in peak cat zone states, as well as the use of vendor models.

With Aon developing its own models, it can provide a sustainable view of risk to help clients create their own view of risk, empowering them to make decisions about risk and return when deploying capital – whether that is an insurance company, private equity firm or large corporation.

“That can also be extended to California,” he suggested, noting the “deeply distressed” state of the personal lines segment in the Golden State.

“Our role is to use advanced data and analytics to help our clients understand potential outcomes and how the wide range of risks with which they are engaging can be measured,” the executive further commented.

Keeping it private

Asked about the trend towards the non-admitted or E&S market as admitted carriers have retrenched, Marcell suggested it represented a “permanent shift”, given the desire among insurers for flexibility of rate and form to try to get a better return.

“The irony of regulation in this particular case is that the more the states seek to control the admitted rates, the more carriers want to become non-admitted. What we don’t want to happen is for the public market to take an even bigger share of the private market.

“The private market needs to be able to provide solutions to solve coverage issues. In order to do that, it needs to understand the risk and have the flexibility to change rates to adjust for the ever-changing reality of climate change,” he commented.

Climate change is just one area Aon is looking to address with its new structure, which also sees its health, wealth and talent businesses come together under a Human Capital unit led by Lambros Lambrou.

“We made the structural change in recognition of the complexity of the sectors in which we operate – whether that be, among other areas, cyber, critical cat, rising insurance rates, or the focus of large corporates on their capital positions and the value of the insurance they’re purchasing,” said Marcell.

Bringing together its 1,000-strong reinsurance analytics division with the hundreds in its commercial risk team on a single platform called Aon Advanced Analytics will allow the firm to help clients better understand risk, quality, what they buy and how they buy, with a view to unlocking capital, he explained.

“You can’t fully achieve those objectives when you’re running a series of separate P&Ls – you have to think holistically about that progression, with Human Capital and Risk Capital,” the executive added.