Aon Report: Macro Environment Influences Risk Strategies and Markets

The dynamics of Q3 2023 were influenced by ongoing geopolitical turbulence and climate-related events, as highlighted by Joe Peiser, CEO of Aon's Commercial Risk Solutions, in his introduction to Aon's Q4 2023 Global Insurance Market Insights Report. Despite persistent inflation, economic resilience was observed.

Mr. Peiser's insights, as outlined in Aon's Global Risk Management Survey, underscored key concerns such as cyber risk, business interruption, supply chain disruption, and talent retention. The heightened interconnectedness and severity of these risks indicate a need for evolving risk-transfer approaches. This evolution involves leveraging rapidly developing datasets and sophisticated modeling to tailor blends of traditional and innovative solutions, aligning risk tolerance and objectives.

Year-End Property Market

Transitioning into Q4 historically marks a significant period for the property insurance market, characterized by peak reinsurance renewals and the gradual easing of the Atlantic hurricane season. However, in 2023, additional complexities emerged amid persistent inflation, a sluggish supply chain recovery, ongoing property and business interruption valuation concerns, and geopolitical volatility. Despite these challenges, insurers remained resilient, adapting and responding to the dynamic property risk landscape. They refined their appetite, coverage language, and underwriting practices while developing innovative approaches and solutions to address evolving risk needs, including leveraging market data to inform placement decisions, according to Aon.

Emergent AI Risks and Trends

Generative artificial intelligence (AI) continues to assert itself as a disruptive force, with its adoption on the rise. According to Bloomberg Research, the generative AI market is projected to soar to $1.3 trillion in the next decade, a significant leap from its $40 billion valuation in 2022. However, alongside its transformative potential, generative AI also introduces new risks and causes of loss that have the potential to impact business partners, including third-party vendors and digital supply chains. Understanding these emerging risks, such as copyright, trademark, and patent infringement, discrimination, and defamation, is still in its early stages. Moreover, the broader implications of these risks are likely to affect various lines of insurance, including technology errors and omissions/cyber, professional liability, media liability, and employment practices liability, among others. In response, insurers are taking proactive measures by refining coverage intent, revising policy language, and enhancing already robust underwriting requirements to address the evolving landscape of generative AI-related risks, according to Aon.

Social Inflation and "Nuclear Verdicts"

As social inflation persisted, the emergence of large judgments, commonly referred to as "nuclear verdicts," remained in the spotlight. Various factors played into this trend, including the overall economic climate and distrust toward large corporations with perceived "deep pockets," as well as aggressive litigation tactics that sometimes swayed jurors. Moreover, shifting social attitudes and the demographics of jury selection, coupled with heightened litigation funding activity, contributed to the phenomenon.

In response, insurers are actively working to counteract the influence of plaintiff attorneys and litigation funders. This involves forming coalitions comprising insurers, brokers, defendant law firms, and policyholders to advocate for tort reform in relevant jurisdictions. These collaborative efforts aim to address the root causes of escalating verdicts and foster a more balanced legal environment.

Market Dynamics

Pricing

Adverse claims trends continued to exert upward pressure on pricing in both auto and casualty sectors. Meanwhile, the cyber and directors and officers (D&O) markets saw a softening trend, with incumbent insurers focusing on retaining and expanding their portfolios. Property pricing remained volatile, driven by apprehensions surrounding inflation, escalating reinsurance costs, and growing concerns about climate change and exposure to natural catastrophes. Additionally, US-exposed risks on non-US placements continued to face challenges.

Capacity

Capacity remained generally adequate across most products and risk categories, with established insurers broadening their appetite and other insurers reentering markets earmarked for expansion. However, the capacity for property risks exposed to natural catastrophes remained limited and costly, prompting continued reliance on alternative solutions such as index-based products, self-insurance, and captive insurance.

Underwriting

As insurers prioritized profitable growth, there was a shift from strict underwriting standards toward a more flexible approach while maintaining discipline. Underwriters focused on individual risk profiles, controls, and performance. The utilization of data and analytics to inform decision-making continued. Superior outcomes were achieved through early engagement with insurers, comprehensive submission details, and the application of insights gleaned from past claims experience.

Limits

Most placements renewed with expiring limits and sublimits intact. Property limits experienced upward pressure due to economic inflation, which—coupled with social inflation and the prevalence of "nuclear verdicts"—also influenced auto and casualty limits. Larger limits became available on cyber and D&O placements as clients sought them in an effort to restore previously reduced coverage. Property valuation methodology details were required.

Deductibles

Most placements achieved expiring deductibles, although increases and minimum deductibles were necessary for some poor-performing risks and higher-risk sectors. Decreases were feasible for well-performing classes and risks; however, they were frequently declined due to disproportionate additional premiums.

Coverages

Coverage enhancements, supported by quality underwriting data, were available in growth-targeted areas as insurers maintained their focus on utilizing coverage terms as a differentiator. Certain exclusions—such as communicable disease, war, and territory restrictions—remained nonnegotiable.

Product Trends

Automobile

A convergence of factors contributed to moderate-to-challenging market conditions. Costs climbed due to inflation, large verdicts and settlements, increasing accident frequency, labor shortages, and advanced automotive technologies. Nonetheless, the presence of alternative solutions and healthy insurer appetite for well-performing risks mitigated market impacts and price increases. The underwriting environment remained disciplined, and innovative automotive technologies further refined underwriting approaches and product offerings.

Casualty/Liability

Moderate market conditions—characterized by a flat to modestly increased pricing, disciplined underwriting approach, and focused but healthy appetite—continued across most of the portfolio, despite insurer concerns related to economic, social, and claims inflation—including biometric privacy, "forever chemicals," and wildfires. Challenging risk types, risks with adverse loss experience, and programs with low deductibles or attachment points experienced a more challenging environment characterized by stringent underwriting, conservative capacity deployment, and material price increases in some cases.

Cyber

Despite the increasing complexity and frequency of ransomware incidents, along with ongoing privacy-related losses, softening market conditions persisted. Growth-oriented insurers expanded their appetite and capacity across the market. Underwriting requirements relaxed somewhat as insurers deepened their understanding of cyber risk and insureds demonstrated stronger security controls.

D&O

Softening market conditions persisted despite a complex backdrop of elevated risks, including geopolitical instability, inflation, equity market volatility, escalating litigation funding, and a changing regulatory landscape. Despite few new buyers, capacity increased further in a market geared toward growth, fostering healthy competition and delivering favorable pricing outcomes for clients. Underwriting discipline remained controlled amid these dynamics.

Property

The disparity between "targeted" and "nontargeted" risks continued. Risks associated with higher-hazard occupancy types, natural catastrophe exposure, or claims-impacted experienced conservative, challenging, and volatile market conditions driven by increased reinsurance costs, natural catastrophe losses, and inflationary pressures. Conversely, well-performing risks and those in lower-hazard occupancies experienced a more favorable environment. Across the portfolio, underwriting remained disciplined. In response to a volatile geopolitical landscape, underwriters further restricted or excluded coverages pertaining to strikes, riots, civil commotion, cyber, terrorism, war, and sanctions while implementing broader geographical exclusions.

Asia-Pacific Summary

Demand for alternative risk transfer solutions increased, underscored by an uptick in feasibility studies exploring captive insurance, parametric insurance, and discretionary mutual funds. Organizations remained committed to reevaluating risk management strategies, seeking solutions to smooth pricing and coverage volatility amid persistent uncertainty. Modest increases in insurance premiums were observed, while capacity expanded as insurers vied to retain and grow their portfolios. Casualty insurance emerged as particularly challenged compared to other classes, prompting insurers to implement rate hikes to address several years of subpar performance. Nevertheless, divisions across product lines and geographic regions experienced growth.

Europe, Middle East, Africa, and UK Summary

Insurers remained focused on the impacts of social and economic inflation amid rising claims costs and reserves, increasing valuations, and pressured profits. Market conditions moderated, except for poor-performing and US-exposed risks, as well as those with natural catastrophe exposure. These segments encountered substantial price increases, capacity constraints, and restricted terms and conditions, often prompting the exploration of alternative solutions. Conversely, the D&O, professional lines, and cyber markets softened, characterized by underwriting flexibility, increased appetite, and robust capacity deployment.

Latin America Summary

Midyear treaty renewals contributed to additional moderation in the market. Pricing varied by business line and risk attributes, while capacity from reinsurers was generally stable. The underwriting environment remained disciplined. Additional restrictions were imposed concerning cyber, the Russia/Ukraine conflict, and hours clauses (pertaining to strike, riot, civil commotion, terrorism, and political risk coverages). Despite these challenges, a positive economic forecast and anticipated growth fueled optimism within the insurance market.

North America Summary

A moderate yet dynamic market environment continued as insurers sought to balance growth with profitability. Pricing remained modestly up while established insurers expanded their appetite and capacity in well-performing segments. Underwriting practices remained tailored to the unique risk profiles of insureds. Concerns surrounding social inflation and "nuclear verdicts" persisted as insurers closely monitored plaintiff activity. Challenges in the property market endured, including ongoing rate increases, intensified scrutiny of valuations, and capacity contractions primarily influenced by reinsurance costs and ongoing natural catastrophe concerns. Risks situated in natural catastrophe-exposed regions and higher-risk industries encountered the most pronounced market hurdles.