What were the most common forms of capital insurers used in 2023?

Alternative reinsurance capital exceeded $100b last year.

The insurance sector's outlook appears positive due to robust pricing and high unmet demand. However, insurers still face challenges with nearly 70% of them increasing their retentions in 2023, and many struggle to boost capital, Aon's Capital Poll highlighted.

The poll also indicated that 60% of respondents believed additional capital would support growth opportunities. Despite below-cost profitability in 2023, insurers aim to capitalise on rate increases through disciplined underwriting.

Reinsurance (60%) was the top capital source in 2023, followed by equity (41%). Alternative reinsurance capital exceeded $100b, with insurers engaging third-party investors. Future capital sources will likely include reinsurance (56%), equity (32%), and third-party capital.

In 2023, insurers' capital buffers were eroded, despite overall adequate capitalisation. The poll unveiled insurers' increased risk appetite and need for additional capital, driven by pressure from stakeholders and ratings agencies. Most insurers now operate with higher retentions, leading to increased earnings volatility.

Higher retentions have resulted in significant volatility for primary insurers, exacerbated by above-average natural catastrophe losses in 2023. Severe convective storms caused global economic losses estimated at $94b.

Rating agencies have noted diverging results between commercial and personal lines insurers. AM Best has a negative outlook on US personal lines, whilst S&P views the entire US property and casualty sector negatively. Fitch remains neutral but does not expect profitability until 2025. Moody’s has a stable outlook on personal lines due to rate increases.

In 2023, 12% of S&P ratings were negative, with three downgrades and no upgrades. AM Best’s downgrades doubled its upgrades. 

Aon's poll showed nearly 40% of insurers felt pressure to increase capital levels, particularly regional insurers who faced investment volatility and high insured losses from natural catastrophes.

From August 2023 to March 2024, AM Best updated 316 rating units, with over 75% experiencing a decline in their BCAR scores. This decline was a major trigger for negative rating actions. Aon expects rating agencies to focus on access to diverse capital sources in 2024.

Aon’s strategy in 2023 and 2024 has focused on delivering new capital sources to insurers, reducing volatility, and enhancing business resilience against rating agency actions. This approach has strengthened insurers' market positions and enabled better business decisions.

Aon’s Capital Poll, conducted in the second half of 2023 with over 200 respondents from key industry conferences globally, examined insurers' risk appetite, capital needs, and attitudes towards current and future capital sources.