John Welch – A Return to Balance and Stability

John Welch, Aspen’s CUO Reinsurance, assesses the reinsurance market in 2024 and looks to the future.

How would you describe the state of the reinsurance markets over the last 12 months?

The state of the reinsurance market over the last 12 months can best be described as balanced. The significant structural and pricing changes of early 2023 have given way to a more stable trading environment across all lines. Significant movements in terms and conditions or price are no longer at the market level and are more closely linked to either specific cedant or regional loss activity.

For the most part, supply is meeting demand across many of the lines of business. From a reinsurer perspective, the market presents profitable opportunities across most lines of business and geographies.

What sectors have offered the best opportunities?

Many of the lines of business are running at, or better than, industry return hurdles. Relatively speaking, US property across cat excess of loss (XOL), proportional, risk excess and facultative are the most attractive along with the mortgage reinsurance market. International property has seen improvement as a response to loss activity and is also currently attractive.

From a casualty perspective, there is adequately priced business available, and, given our historically limited share of this market, it has provided opportunities to increase our support of current clients.

We do, however, recognize the ongoing uncertainty around social inflation and as a result choose our partners carefully.

What sectors have been most disappointing?

The sector that has been somewhat disappointing is the U.S. regional business, and particularly the property placements. There has been an above average amount of loss activity for this segment in the past few years, primarily but not exclusively because of cat activity.

In our view, this segment needs more rate to be adequately priced and consequently we have reduced our exposure. In addition, we were somewhat disappointed with the momentum in rate increases in the marine market as we felt larger increases matching loss trend were more appropriate. However, after the collision of the vessel Dali with the Baltimore bridge in March we may see a reacceleration in rate going into 2025.

The world seemingly offers more complex and varied threats than ever before. How do you manage these different but interconnected threats in maintaining your company’s reinsurance portfolio?

The risk management process for a reinsurer begins with selecting the right partners. We look for partners with robust risk management processes of their own as well as deep pools of quality data. We rely heavily on our underwriters to understand the cedants’ strategies and appetites and build a portfolio that considers the aggregation of risk as well as what the tail losses may look like.

From an Aspen Group perspective, we use this information to evaluate a number of risk scenarios across lines of business and for our reinsurance and insurance segments. We manage within strict risk tolerances, have a keen understanding of our market share across all lines and geographies and have significant support from our own reinsurers as well as our third-party capital partners.

This does not eliminate the “unknown unknowns” but it has resulted in recent complex industry events being well within our risk tolerances.

In the property reinsurance market rates have held fairly steady in the last six months after the major increase in rates in 2023.  What do you attribute that to?

Property-catastrophe rates in the US have held steady over the last six months for a number of reasons. The biggest driver is the impact of the increased retentions and the resulting reduction in secondary peril losses coming out of 2023. 2023 and the first half of 2024 experienced a great deal of cat activity, but a significant amount was within the cedants’ retentions, resulting in little to no impetus for further rate increases at the market level.

While 2023 was generally a very good year for the reinsurers, it came on the heels of a string of poor cat years which has led to a great deal of discipline among the reinsurance underwriting community.

This has resulted in a reluctance to compromise on retentions and has limited the amount of rate reduction that clean programmes were able to achieve.

With respect to the supply vs. demand dynamic in the US property catastrophe market, it appears to remain at equilibrium as additional purchases to address concerns about inflation have been met with additional capacity from the market. Looking outside US property-cat, we continue to see double-digit rate increases in both our international property-cat book as a result of 2023 activity as well as our property risk excess books around the world.

Do you think rates—and terms and conditions—will continue to hold in the next 12 months?

The evolution of rates and terms and conditions will vary by line of business and geography and will be heavily influenced by loss activity over the next six months. From a US property perspective, we will have to see whether the forecast of a very active 2024 hurricane season results in significant insured loss.

Barring significant loss, I would expect 2025 to look similar to 2024 with modest rate concessions for loss-free programs throughout the year. I do not expect there to be much downward movement in retention levels even with a favorable 2024.

From a casualty perspective, continued adverse loss development, not only out of the historically active 2015 to 2019 years but also with cedants reporting adverse development in the more recent accident years, will lead to ongoing rate increases at least equal to loss trend across the more problematic classes.

You said in 2023 that you saw marine and mortgage as two area of possible growth. Is that still the case?

A year ago, after joining Aspen, my view was that our primary growth opportunity was in the specialty re lines. While that did prove to be the case as we expect to double the mortgage book and increase the other specialty lines including marine by 30 percent in 2024, I was pleasantly surprised by the opportunity in casualty where we are up close to 50 percent through six months.

Our major cedants were looking to diversify their panels and we have been able to increase our modest expiring shares over the year in addition to adding new business with our largest cedants. Historically, Aspen has not had significant exposure to the casualty market, and we feel there is currently an opportunity to step up on profitable business with cedants who we support across many of our other lines of business.

What other areas of opportunity do you see?

We would like to continue to grow our casualty and specialty books as we look at 2025. In particular, we are thinking about entering the US health reinsurance business as an opportunity to diversify our portfolio with business that tends to be less volatile. In addition, we are looking at ways to support our cedants in the cyber reinsurance space.

Recently, Aspen Insurance has been the source of cyber risk for the broader group, so there is little cyber exposure on the reinsurance side.

We have been exploring different strategies for Aspen Re to enter the cyber market and may decide that this presents an opportunity in 2025.

Some casualty segments have been challenging due to prior year adverse developments. Do these signal an opportunity or something to be avoided?

As mentioned earlier, we see the casualty market as an opportunity for Aspen. We were underweight in the more problematic underwriting years, so we are not looking over our shoulders every quarter at the mistakes of the past. However, we do believe we are learning from the broader challenges being experienced by the market and are quite cautious in terms of pricing, risk selection and partners.

Our growth has primarily been with existing cedants where we have an ongoing relationship and a very good understanding of their underwriting acumen and strategy. We prefer those cedants with deep pools of historical data and tend to limit our writings with more recent entrants to the market.

It remains a challenge to fully understand the impact of social inflation, so we tend to make conservative assumptions. We believe the casualty market will continue to present us with opportunities going into 2025.

What issues are a cause for concern?

The issues we are keeping a close eye on include whether rate change is keeping up with loss trend across the casualty lines of business, pressure on property-cat XOL retentions and rates along with the heightened forecast for hurricane activity, and geopolitical risks affecting the specialty lines of business.

What does Bermuda need to do to continue to be a leading reinsurance center?

As with any market, the keys are business opportunities and talent, with the latter being more of a concern. Given the limited talent pool, Bermuda should continue to look for ways to retain and grow the talent in the industry which should provide employers with a more affordable and diverse approach to growing their local teams and portfolios.

This article was originally posted on Bermuda: Re+ILS.

John was also featured on The Voice of Insurance podcast, and in an Insurance Insider video interview that you can view below.