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Aon warns Ukraine war will hit reinsurers' risk appetites as financial headwinds build

Rising inflation and equity market volatility have already battered reinsurers in the first quarter, but the sector generated strong returns in 2021 on the back of rising investment returns and rate increases

Aon has warned that the war in Ukraine and the lingering effects of the pandemic could be a drag on reinsurers’ performance in 2022 and curtail appetite for risk.

The global broker said reinsurers face a more difficult economic environment, with interest rates rising more quickly than expected to combat inflation.

This has been exacerbated by Russia’s invasion of Ukraine and the continued impact of Covid-19 in some countries such as China.

Reinsurers have already faced a hit in the first quarter of the year from unrealised losses on bond portfolios and weak stock markets amid the volatility caused by Russian’s invasion, Aon said.

And despite a strong underwriting performance in the first quarter, these circumstances “have the potential to affect appetites for casualty and specialty reinsurance as well”, Aon said.

It comes as the sector’s appetite for writing property catastrophe business has been dampened by the impact of climate change, the broker added.

“The reinsurance sector is to be applauded for absorbing significant volatility over the last five years and emerging with its capital base and ratings largely intact.

“However, in some cases, consequent earnings pressure, coupled with ongoing uncertainties around the impact of climate change are now constraining appetites for underwriting property catastrophe reinsurance business.”

'In some cases, consequent earnings pressure, coupled with ongoing uncertainties around the impact of climate change are now constraining appetites for underwriting property catastrophe reinsurance business'

Aon

Despite the recent economic headwinds, reinsurers last year achieved the strongest return on equity (RoE) since 2014 on the back of strong investment returns and rate increases, analysis by Aon found.

Reinsurers achieved a return on equity (RoE) of 10.9% in 2021, with net income of $22.8bn.

The sector's RoE reached 11.3% in 2014, but subsequently deteriorated over subsequent years reaching a low of 2.7% in 2017 before climbing again to 9.5% in 2019.

During the pandemic-hit year of 2020, reinsurers reported an RoE of 2.3%.

Investment returns provided much of the impetus last year, with equities and other alternative assets performing strongly during the year.

The total investment return rose 20% to $33bn, representing a yield of 3.7%

On the underwriting side, pandemic-related impacts diminished, revealing the benefits of compounded rate increases and tightened terms and conditions, although still with an overlay of above-average natural catastrophe losses.

Insured natural catastrophe losses surpassed $110bn in 2021, according to Swiss Re.

Property and casualty underwriting profit stood at $7.6bn in 2021. This represented a combined ratio of 96.2% - which was more than seven points better than the previous year and the lowest combined ratio since 2016.

The broker analysed the financial results of 22 companies which together underwrite more than 50% of the world’s life and non-life reinsurance premiums, and are therefore a reasonable proxy for the sector as a whole.

Mike Van Slooten, head of business intelligence at Aon, said: “These were good results, given the extent of the natural catastrophe activity in 2021, but the past five years have been challenging from an earnings perspective.

“Results have diverged over this period and recent changes in underwriting risk appetite reflect attempts to manage volatility, in what has become a very complicated risk environment,” he added.

With continued financial turbulence ahead, Van Slooten said developments in the capital markets will have a "strong bearing" on the sector's performance in 2022.

 'These were good results, given the extent of the natural catastrophe activity in 2021, but the past five years have been challenging from an earnings perspective'

Mike Van Slooten
Aon

 

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