Reinsurance Market Outlook

As we look to January 2023 renewals, we anticipate a rough ride as macroeconomic volatility and changing loss trends alter the supply and demand dynamic. Capacity constraints, high inflation, and secondary perils are likely to result in a tougher renewals period for reinsurance buyers.

Global Reinsurance Market Summary

Based on Aon’s estimation, the total global reinsurer capital is standing at $645 billion on March 31, 2022, a reduction of $30 billion relative to the end of 2021, driven principally by unrealized losses on bonds, linked to rising interest rates. This calculation is a broad measure of the capital available for insurers to trade risk.

Exhibit 1: Global Reinsurer Capital up to Q1 2022 ($ billions)

Traditional Capital: Volatility Weighs on Investment Returns

Aon estimates that the equity of traditional reinsurers declined by around 5% to $548 billion over the three months to March 31, 2022. Underwriting results were generally strong during the period, but investment returns were undermined by volatility in the financial markets, linked partly to Russia’s invasion of Ukraine. Interest rates rose to counter growing inflationary pressures, resulting in unrealized losses on bond portfolios, while weak stock markets reflected the deteriorating economic outlook.

Alternative Capital: Demand Outpaces Supply

Demand for catastrophe bonds currently outpaces supply, as insurers and reinsurers increasingly turn to alternative capital markets to supplement traditional reinsurance and maximize placements in a challenging environment. However, the first half of 2022 has been more challenging as insurance-linked securities (ILS) investors paused to re-evaluate their view of overall asset allocation during a period of geopolitical, macroeconomic, and financial markets volatility. ILS investors, which have endured higher catastrophe losses in recent years, have been more selective and pushed for improved structural terms and pricing.

Nevertheless, the pipeline remains robust. Midway through 2022, the catastrophe bond market remains on track to match last year’s record issuance, having reached $7.94 billion at 1H 2022 − a similar level as the same period in 2021. It is expected that the current uncertainty in the insurance-linked securities (ILS) market is to be relatively short-lived and that new investors and fresh capital will be attracted to the market, which continues to offer value and diversification throughout the financial markets cycle.

Exhibit 2: Reinsurance Sector Results up to Q1 2022

The macroeconomic factors were evident in the results of Aon’s Reinsurance Aggregate constituents reporting on the first quarter of 2022. Underwriting performance was strong (average combined ratio: 92.8%), but investment returns were undermined by unrealized losses on bonds and weak stock markets. This impacted both return on equity (average non-annualized result: 0.6%) and reported book values.

Inflation on the Rise

Inflation is the number one topic for property renewals in January, affecting all markets to varying degrees. Higher exposures and the prospect of increased claims costs will drive demand for limit, as well as shape reinsurers’ view of risk.

Inflation related to property insurance is up to varying degrees in all regions, with peak peril risk in the US seeing some of the highest impacts. An estimated additional $5 billion in reinsurance limit was sought by insurers at the June and July 2022 renewals, largely a reflection of higher inflation expectations.

Demand for additional limits at January renewals will likely exceed mid-year increases on a nominal basis, but the percent impact may not be quite as significant.

The effect of inflation and supply chain disruption is also a key area of concern for reinsurers, which will want to understand its impact on exposures and pricing. The inflationary effect on claims, which lags economic inflation, creates further uncertainty for natural catastrophe exposures. Insurers around the world will face probing questions on inflation at the January renewals and those that provide a granular story and demonstrate the robustness of their business through well-articulated underwriting actions will achieve more favourable terms.

Above Average Catastrophe Losses

The first six months of 2022 were marked by large-scale disasters on nearly every continent that led to above-average losses for the insurance industry. The first half also saw brand new complexities added to the event response process (including higher replacement costs and reinsurance placements) that were influenced by challenging outside societal and financial factors – notably the war in Ukraine and the highest inflation seen in decades.

The cumulative charts in Exhibit 3 below show secondary perils continuing to dominate the costliest 1H economic and insured loss perils during the past ten years. Primary perils, including earthquakes and tropical cyclones, have been moderately lighter through the peak of tropical cyclone season, typically in Q3. There has been a consistent trend in accelerating severe convective storm losses that are tied to continued exposure growth and more impactful peril behaviour. Also, despite the high cumulative economic impact of flooding, insured losses remained significantly lower as insurance coverage (mostly in Asia) stays low.


Exhibit 3: Cumulative Economic & Insured Losses by Peril up to 1H 2022 ($ billion)

As the focus shifts to Q3 2022 – which is often the costliest quarter of the year – and Q4 2022, there will be a particular focus on the Atlantic Hurricane Season and the potential of landfalling storms. Elevated wildfire activity and the continual threat of severe convective storms will also require close monitoring.

Ongoing Work on ESG and Climate Change

Climate change, and environmental, social and governance (ESG) issues, more generally, are ongoing areas of work for ratings and regulators. The major rating agencies continue to develop ESG methodologies, as well as wrestle with the implications of climate change on reinsurers’ financial strength, including how climate change is reflected in insurers’ catastrophe modelling and pricing.

Climate change is seen as a major risk factor for the reinsurance and insurance industry, in particular with the increased frequency and severity of weather-related events in recent years. S&P analysis found reinsurers’ estimates of their exposure to natural catastrophe risk could be underestimated by as much as 33 to 50 percent. More frequent and extreme weather events will have a direct impact on the (re)insurance industry, while a failure to properly account for the impact of climate change in modelling and pricing could lead to significant unexpected volatility in earnings and capital, resulting in pricing corrections. Climate change is considered a key factor in 19 of the top 21 reinsurers rated by S&P. In 2021, AM Best issued a report stating around 13 percent of downgrades were related to climate change.

Navigate a Challenging Market

Despite the market headwinds, there are still opportunities to achieve favourable outcomes at the January 2023 renewals. Differentiation and transparency are critical. Capacity is at a premium, and reinsurers are becoming more selective of the risks they are willing to support. In today’s market, clients that listen to reinsurer concerns and tell a granular story will secure capacity at the best available terms and conditions.

All parties at renewal will need to be flexible and pragmatic. Insurers will need to anticipate how changes in the market will affect their programs and keep an open mind to alternative solutions and sources of capacity.


    • Aon’s Business Intelligence
    • Aon Securities Inc.
    • Aon Catastrophe Insight
    • Aon Thought Leadership


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