The challenges of 2023 eroded the buffers that many insurers had previously enjoyed, bringing an increased focus on capital management and a variety of capital sources, according to Aon’s capital poll.
With robust pricing levels in many primary insurance markets and significant unmet need, the outlook for the insurance sector appears more positive. However, insurers still face challenges.
Aon’s Capital Poll highlighted that reinsurance was the most common source of capital used by respondents (60%), followed by equity (41%). Given the higher retentions experienced on the primary side throughout 2023, Aon noted that it is not surprising that insurers seek to cover those gaps when possible.
Alternative reinsurance capital, meanwhile, surpassed $100 billion in 2023, with insurers engaging with third-party investors for additional capacity.
For future capital sources, reinsurance (56%) and equity (32%) were the primary choices, followed by third-party capital. The lower interest in future legacy solutions may change given reserve development trends in 2023 and ongoing concerns about reserve strengthening on liability lines due to social inflation in 2024.
Although overall capital levels remain adequate, the difficulties of 2023 reduced many insurers' previously held buffers. Aon’s Capital Poll examined insurers’ risk appetite, their need for additional capital, and their perspectives on current and future capital sources.
The poll revealed that a substantial proportion of insurers are under pressure from stakeholders, including ratings agencies, to enhance capital. It also indicated that the majority now operate with higher retentions, leading to increased earnings volatility.
As a result, there is a heightened focus on capital management. Insurers reported in Aon’s Capital Poll that they are exploring a variety of capital sources as demands on capital evolve and growth opportunities emerge.
Following the challenging reinsurance renewal of January 2023, many primary insurers experienced increased retention levels. Nearly 70% of Aon’s Capital Poll respondents indicated that their retentions rose for programs renewing in 2023.
This has resulted in significant volatility in primary insurers’ results over the year, exacerbated by natural catastrophe losses, which remained above the historical average in 2023. Severe convective storm (SCS) activity was notably impactful, with Aon estimating global SCS economic losses reached $94 billion that year.
The poll results show a divergence between commercial and personal lines writers. Slightly under 40% of respondents reported pressure to increase capital levels from various stakeholders. While the industry overall remained adequately capitalized, capital metrics deteriorated, particularly for regional insurers. Companies faced investment volatility and elevated insured losses from natural catastrophes in 2023.
On the rating agency side, Aon noted a significant erosion in insurers’ capital buffers as assessed by AM Best’s Capital Adequacy Ratio (BCAR) score. Between August 2023 and March 2024, AM Best updated 316 rating units, with more than 75% experiencing a decline in their BCAR.
Changes to AM Best’s balance sheet strength assessment, linked to BCAR declines, were among the leading triggers for negative rating actions in 2023. Aon anticipates that access to diverse sources of capital will be a focus for rating agencies in 2024.
Aside from revealing intentions to strengthen balance sheets to improve financial strength ratings, the Capital Poll asked respondents if additional capital would help meet growth targets. Sixty percent indicated their company would materially benefit from additional capital to support growth opportunities.
Although profitability for many primary insurers was below their cost of capital in 2023, disciplined underwriting is expected to continue, and companies are seeking opportunities to capitalize on compounding rate increases.
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