Aon has called on insurance and reinsurance companies to optimise their capital stack and align it with their strategy, including through the use of alternative and ILS capital structures, in a market where an analytics-driven approach is critical to delivering efficiency, flexibility and returns.
In an article explaining the strategic imperatives for re/insurers to drive performance and stay relevant through the market cycle, Paul Campbell, Head of Growth, Strategy and Technology Group and Brandon D. Miller, Consulting Director, Strategy and Technology Group, both of broking giant Aon, highlight the benefits of considering all forms of capital.
The pair state that, “The forces reshaping insurance in 2025 are intensifying. Capital is abundant, with global reinsurance capacity estimated at a record $720 billion and 1H seeing an all-time high of $17 billion in catastrophe bond issuance. This signals growing investor demand for non-correlated returns, but it also sharpens competition, squeezes pricing power and raises the stakes for differentiation.
“Meanwhile, geopolitical pressures — from protectionism and civil unrest to persistent inflation — are complicating underwriting assumptions and dragging volatility into claims environments. Interest rates remain flat across major markets, leaving little room for investment yield strategies to paper over underwriting shortfalls.
“The market may be softening, but risk is growing.”
Companies need to adopt an analytics-driven approach to optimising the capital stack for efficiency, flexibility and returns, Campbell and Miller explain.
They wrote, “Relevance is not a phase — it’s a discipline. In a market defined by volatility, insurers must embed strategic relevance into every decision to outperform through the cycle.
“To effectively respond while driving profit and delivering consistent returns to shareholders, insurers themselves — as reinsurance buyers — are evolving. They are seeking structures that are agile, transparent and strategically aligned to their own customers’ objectives.”
Strategic alignment of capital sources and structures used is seen as critical, as re/insurers move through the market cycle and face growing risks.
“Finding the right balance between risk and capital requires careful planning and strategic decision making. Insurers must reassess whether their capital structures align with where and how they go to market. Disconnected internal structures, rigid legal entities and under-utilized capital all contribute to inefficiency and missed opportunities,” the authors from Aon explain.
They urge re/insurers to map out capital flows within their businesses, to identify where internal constraints may be preventing growth, while developing guiding principles for how best to use capital forms and structures.
Re/insurers should also,”Review opportunities to drive capital efficiency; optimize reinsurance and consider alternative capital vehicles like sidecars to improve cost efficiency and underwriting responsiveness,” the authors say.
While stress-testing capital deployment against distribution volatility and undertaking holistic multi-line reviews to optimise their reinsurance expense.
In addition, the authors from Aon advise exploring additional capital raising opportunities, including through quota shares, sidecars and debt to fund growth.
At the same time they advise aligning engagement with distribution partners to target deployment of capital to opportunities that support growth objectives.
In the article, the authors highlight the example of a reinsurance company utilising third-party capital through its insurance-linked securities business and joint ventures to supplement its balance-sheet by 75%. This enables the firm to write larger lines, support clients more consistently through the underwriting cycle and expand its property catastrophe portfolio, all while earning meaningful fee income, the authors state.
In addition, they call on insurers to refine their plans for growth, including a focus on refining their models for alternative risk transfer and parametric triggers in sectors with high volatility or low traditional coverage, while also exploring opportunities in structured and multi-year products.
Aon is calling on the insurance and reinsurance industry to become more analytical and strategic with their use of capital, in all of its forms.
Leveraging the appetite of third-party capital to support growth and effectively lever up the re/insurance balance-sheet to do more in a targeted and strategic manner is one of the keys to growing through market cycles, especially in this increasingly volatile world.
There is a clear opportunity for re/insurers to learn from the example set by those already embracing ILS and the capital markets, to accelerate and sustain their own expansion and growth.
