Hard Market Trends Decelerated in 2022, Though Challenges Remain

The insurance market's hard market trends continued to decelerate in 2022, with new capacity arriving either through new market entrants or expanded insurer appetites in areas targeted for growth, according to a new report from Aon.

In an introduction to Aon's Q4 2022 Global Market Insights Report, Lambros Lambrou, chief executive officer of Aon Commercial Risk Solutions, suggests that even as the market's hardening slowed, insurers continued to exhibit rigor in their underwriting as they focused on reducing volatility through best-in-class risk selection.

"Some placements renewed with increased limits as valuations were scrutinized and as a result of inflation-driven exposure increases," Mr. Lambrou wrote. "Some limits were restored from limit reductions that took place during 2020 and 2021, although client demand for restoring limits did not materialize at the pace expected. Coverage stability returned and broader terms were achieved in cases where insurers leveraged coverage as a differentiator. However, 'soft market clauses' remained generally unavailable."

The Aon report notes that modest price increases continued in the fourth quarter of last year, driven by such factors as inflation and anticipation treaty reinsurance renewals. Meanwhile, improved insurer performance, increased capacity, and insurers' focus on retention and growth continued to dampen price increases.

"While conditions were moderate overall, sectors and risks deemed likely to create volatility for insurers experienced a more conservative and challenging pricing environment, with natural catastrophe property experiencing the most significant increases," the Aon report says.

The report notes that though inflation-driven increases in values and losses led to additional demand for capacity, capacity remained sufficient across most insurance lines as new capital continued to enter the market while existing players sought to retain and increase their market share.

Notable exceptions to that capacity trend were seen in natural catastrophe-exposed property and political violence and terrorism, which each experienced tight capacity and often required the use of additional solutions such as captive insurance, reinsurance, and alternative program structures, Aon says.

The Aon report notes that the recent "two-tiered" nature of the underwriting environment became more pronounced in the fourth quarter. "Well-performing risks with robust underwriting information in targeted classes experienced a flexible but disciplined environment while poorer-performing, out-of-appetite risks—especially those with insufficient underwriting detail—experienced limited appetite, rigorous underwriting, and few options," the report says.

Aon notes that discussions with underwriters were dominated by three themes during the quarter: social, core, and claims inflation; concern over upcoming treaty renewals, and continued geopolitical instability.

Deductibles generally remained stable during the fourth quarter, Aon says, although increases were seen for challenging risks such as those with natural catastrophe exposures, as well as poor performing risks and those deemed to lack sufficient controls. In addition, minimum deductibles were applied to designated business sectors, according to the report, while the trend among insurers to withdraw property damage/business interruption deductibles in favor of time element deductibles continued.

While in general hard market conditions moderated during the quarter, insurers showed only a limited appetite for restoring "soft market clauses," the report says. While coverages were generally stable, restrictions remained in targeted areas including cyber; terrorism; war and sanctions; strikes, riots, and civil commotion; infectious diseases; and margin clauses/values limitation clauses in cases where asset values weren't sufficiently substantiated, Aon says.

Among the trends seen in individual lines during the fourth quarter, market conditions for errors and omissions (E&O) and cyber insurance stabilized, Aon says. Though they did remain challenging in certain regions and industry sectors, market conditions for E&O and cyber generally became more buyer friendly as insurers continued to see improving profits as well as improving loss ratios as claims frequency decreased compared to 2021.

E&O and cyber buyers continued to have access to new capacity, which contributed further to the stabilizing rate environment, according to Aon.

The property insurance market remained moderate to challenging in the fourth quarter due to challenging treaty renewals, natural catastrophe losses, geopolitical events, inflation, and asset valuations, Aon says. Natural catastrophe and political violence coverages were an exception to that trend, seeing difficult market conditions. Alternative risk transfer solutions and higher retention became important factors in meeting property program goals during the fourth quarter, Aon says.

Among casualty/liability lines, market conditions remained moderate with sufficient capacity and flat to modestly upward pricing, Aon says. Primary and lower-layer excess casualty placements saw moderate conditions while higher layer excess casualty saw more volatility, the report says.

Coverage enhancements were available for well-performing casualty risks with quality underwriting information, Aon says. Meanwhile, claims inflation and large losses dominated underwriting discussions.

Despite the market improvements, in his introduction to the report Mr. Lambrou notes that 2022 was a challenging year due to a variety of factors, many of them interconnected.

The onset of the Russia-Ukraine war was one such factor, according to Mr. Lambrou, resulting not only in loss of life and destruction of property but also market volatility as experts tried to gauge the impact of the changing geopolitical landscape.

Inflation, driven in part by the geopolitical environment, posed another challenge in 2022. "Inflation in the [United Kingdom] was at a 40-year high, while the [United States] saw broad inflation unexpectedly accelerate to 8.6 percent in May," Mr. Lambrou wrote. "This worldwide inflation translated into high fuel costs, which in turn led to high energy costs, high food costs and an overall increase in the prices of goods and services."

While governments and central banks took steps to tame inflation, the economic landscape will likely remain fragile for some time to come, according to the Aon executive.

Other challenges included cyber risk; supply chain issues; food security; climate transition; energy security; environmental, social, and governance factors; and public sentiment, Mr. Lambrou says. Together, the various challenges are likely to pressure businesses over the medium to long term, he wrote.

"Since these risk areas are evolving and highly interconnected–as we have seen firsthand with the geopolitical conflict–it is ever more vital that businesses commit to building resilience, including maintaining a well-informed, broad strategic approach to risk," Mr. Lambrou wrote.