Insurance carriers are still dealing with the fallout from the most challenging reinsurance market in a generation, where there was a significant fundamental pivot in pricing and risk appetite, especially for property catastrophe risk. In the AAIS Pulse session, Exploring Fundamental Shifts in the Reinsurance Market, host Ed Kelly led a discussion with Andy Marcell, CEO of Aon Reinsurance Solutions, and Frank Nutter, President of Reinsurance Association of America (RAA), as they shared insights on what caused such dramatic changes across the industry, the government reaction, and how carriers can prepare themselves for success moving forward during this challenging time.

Repercussions From Failure of Silicon Valley Bank and FDIC Bailout

Before the discussion jumped into the reinsurance market, panelists were asked if they thought there could be any repercussions in the insurance/reinsurance markets as a result of the Silicon Valley Bank collapse and the government providing access to FDIC funds to preserve deposits. Nutter believes the situation is non-directly affecting the insurance sector. “Looking at the [insurance] industry’s investments, they are not heavily exposed to banks at all let alone the Silicon Valley Bank or the others that have been highlighted in the media,” said Nutter. “However,” he added, “the industry does provide directors and officers coverage that could be exposed if there are more issues with the banking sector.”

Marcell agrees that the industry is not heavily affected but believes the exception is that commercial risk and financial institution rates have been falling 30% for the last six months, allowing reinsurers to think more critically about the level of seeding commissions. “Will there be an economic slowdown that will further exacerbate any reserve development? I don’t think that’s likely, but that’s the conversation that’s happening for sure,” said Marcell.

Major Issues Resulting from the Latest Renewal Season

It would suffice to say that the January 1 renewal season was a tough one for the reinsurance market. Aon called it a “turning point…a new reality” for buyers and a fundamental shift in pricing and risk appetite, especially for property CAT risk. Marcell says that climate change, specifically the frequency of perils like wildfires and floods, is a major issue that has resulted in such a tight market. “Reinsurers have failed to return their cost of capital to investors for some time,” said Marcell. “Eventually, people redirected their capital to their insurance operations that are out of the industry altogether. As a consequence, the tightening in the marketplace was somewhat inevitable and it was exacerbated by [Hurricane] Ian.”

Marcell believes that in the end, when you consider property inflation, U.S. clients need to buy more to offset the inflation revalues. “Interest rate rises are generally good for insurance companies except when you’re having to market your losses and you have less capital,” he explained. “So, reinsurers having to take on the additional demand and the need to drive more rates caused a squeeze on clients. [Aon] had predicted that there would be a significant rate change but the speed at that it happened was very disorganized, which was more of a concern to clients.”

Government Action Regarding the Market

When reinsurance capacity is hard to find, it ends up affecting policyholders, and there is often a concern, if not action by the government. Since Nutter has testified before Congress about the National Flood Insurance Program, Terror Risk backstops, and other important issues affecting the reinsurance market, Kelly asked if he believes the government is acting judiciously regarding this market today. “The industry faces a dilemma that if companies are either skittish about or pulled back from consumer markets, the government is [not] going to let that happen without some action,” answered Nutter. In that regard, RAA has looked at government programs that ensure there is a risk transfer opportunity for reinsurers. These include the National Flood Insurance Program, which is a fully government-backed program that buys reinsurance from the private sector, Fannie Mae and Freddie Mac, other government-backed programs that credit risk transfer in the private reinsurance sector, and the California Earthquake Authority, which fills the need that insurance companies are not interested in and buy a lot of reinsurance.

Outlook on U.S. Reinsurance Market

Looking ahead, Kelly asked how panelists would characterize the outlook for the U.S. reinsurance market. Marcell assumes that clients will continue to be frustrated due to the lack of clarity from January 1. “From our client’s perspective, it’s going to be more consistent [and] more stable than it was January 1, but it’s still going to be expensive relative to what they have experienced in the preceding few years,” said Marcell. He stated there is a bit of a mixed bag from a reinsurer's perspective – they'll be keeping a close eye on reserve development and the demand given the economic slowdown for their products. “They will get the rates, structure, and programs they were seeking. The larger question is, on the casualty side, what the opportunity will be as the rate change in the original casualty businesses [continues to go] up. They’ll be hoping that they can sustain the same rate level on the property side, which is likely to continue unless capital flow is locked up.”

To view the entire interview with Andy Marcell and Frank Nutter, click on the video above.