Navigating the Capital Challenges of 2023: Insights from Aon's Capital Poll

The year 2023 posed significant challenges for insurers, eroding many of the capital buffers that companies had previously relied upon. According to Aon's Capital Poll, this period of financial strain has heightened the focus on capital management and the exploration of diverse capital sources. The report delves into the key findings from Aon's poll, providing insights into the pressures that insurers face and their strategies for navigating this complex landscape.

Increased Demand for Reinsurance

A significant takeaway from Aon's Capital Poll is that 60 percent of companies would benefit from additional reinsurance to support growth. This trend underscores the critical role of reinsurance in providing the necessary capital to manage risk and foster expansion. With the challenges of 2023 leading to higher retention levels and increased earnings volatility, reinsurance offers a vital mechanism for stabilizing financial performance and mitigating risk.

Pressure To Boost Capital Levels

The poll revealed that 39 percent of respondents felt pressure to increase capital, a sentiment driven by various stakeholders, including rating agencies, regulators, and investors. This pressure is evident in the statistic that 75 percent of companies experienced a drop in their Best's Capital Adequacy Ratio (BCAR) over the last 8 months. This decline in capital adequacy highlights the need for insurers to bolster their financial strength and maintain favorable ratings.

Erosion of Capital Buffers

Despite remaining adequately capitalized overall, insurers have seen their buffers erode due to the challenges of 2023. This has led to a heightened focus on capital management, with companies exploring a variety of capital sources to meet evolving demands. The increased volatility in earnings, driven by higher retention levels and natural catastrophe losses, has further underscored the importance of robust capital strategies.

Divergence in Insurance Lines

The performance of insurers has varied significantly between commercial and personal lines. Rating agencies have noted a divergence, with commercial lines showing stronger performance metrics, particularly in the excess and surplus lines segment. In contrast, personal lines have struggled with rate adequacy due to regulatory hurdles, leading to a more challenging environment. This divergence is reflected in the differing outlooks from rating agencies: while AM Best and S&P maintain a negative outlook on the US personal lines market, Moody's has moved to a stable outlook as profitability improves.

Impact of Natural Catastrophes

Natural catastrophe losses have played a significant role in the financial strain experienced by insurers in 2023. In particular, severe convective storm (SCS) activity had a substantial impact, with global SCS economic losses estimated at $94 billion. This high level of loss activity has exacerbated the volatility in insurers' results and highlighted the need for effective capital management strategies.

Future Capital Sources

Looking ahead, insurers indicated that reinsurance and equity would be their primary sources of capital, followed by third-party capital. This preference for reinsurance and equity reflects the need for reliable and substantial capital sources to support growth and manage risk. The poll also revealed that, while alternative reinsurance capital surpassed $100 billion in 2023, insurers are increasingly engaging with third-party investors for additional capacity.

The Role of Rating Agencies

Rating agencies have been a significant factor in the pressure to increase capital levels. A notable erosion in capital buffers, as assessed by AM Best's BCAR score, has led to a number of negative rating actions. Between August 2023 and March 2024, more than 75 percent of the 316 rating units updated by AM Best experienced a decline in their BCAR. This trend underscores the importance of maintaining strong capital metrics to avoid negative rating actions and the associated financial implications.

Strategic Capital Management

In response to these challenges, insurers are focusing on strategic capital management to enhance their financial resilience. The poll indicated that 60 percent of respondents believe their company would benefit materially from additional capital to support growth. This additional capital is seen as crucial for taking advantage of growth opportunities and navigating the current market environment.