The January 1st 2018 reinsurance renewals were “one of the most unique and challenging renewal seasons witnessed in recent times” for the retrocession market, according to broker Willis Re, but still underlying retrocession and reinsurance pricing remain mismatched for now.
The renewals saw a considerable focus on retrocession, with fears of a capacity crunch after a significant amount of collateralized capacity was trapped or lost in advance of the contract negotiations.
But the market reloaded successfully, with most ILS players replenishing lost and trapped collateral and a number of traditional reinsurance markets returning to the retro space for the first time in a few years, all of which helped to dampen the potential for price rises at the key January signings.
“Concerns of a capacity crunch were quickly dismissed as the ILS market reloaded and the traditional market responded with an increased appetite,” Willis Re explained.
James Kent, Global CEO of Willis Re, further commented that after the major catastrophe losses of the second-half of 2017 it was clear that ILS funds were successfully weathering the storm, “with investors prepared to recapitalize to make good both lost and illiquid trapped capital.”
This was absolutely key to the retrocession market, enabling ILS funds and alternative capital providers to deliver continuity at the renewal to their client base, many of whom had made claims on their retro programs and as a result needed to replenish them where they were multi-year.
This ability to offer continuity even after a major aggregation of loss events that negatively affected the retro market as much, if not more, than the wider property catastrophe reinsurance space, has been a key example of the ILS fund markets ability to trade forwards effectively.
Prior to the renewals there had been considerable discussion on the resilience of ILS markets and the potential impact of the losses on retrocession rates, as well as available capacity and costs.
Some forecasts had called for rate rises of 40% or higher, across retro markets, but in the end Willis Re reports a more moderate +5% to +15% across catastrophe loss free accounts and +10% to +30% across catastrophe loss affected accounts.
But still, January 2018 has proved to be “one of the most unique and challenging renewal seasons witnessed in recent times” for the retrocession market, according to Willis Re.
At the renewals, there was a considerably variation in pricing, depending on the experience of the ceding company, their losses, past experience and trading relationships over recent years.
Largely, markets preferred to maintain similar attachment levels to retrocession arrangements, taking more money for the same level of risk being preferable to increasing their exposure.
But despite the unusual market dynamic at 1/1 2018 in retrocession, Willis Re notes that there is still a mismatch between reinsurance and retrocession pricing.
“How long can this continue and who will break first remains the key challenge for 2018,” the broker mused.
The steepest increases in rates were always going to be found in the retrocession market, but it is encouraging that the market has functioned so well after the losses and that rate rises have been moderated somewhat by market participants ability to recapitalise and the amount of capacity targeting retrocession renewals.
That too signifies a healthy functioning of the market, with supply helping to even out demand side factors, meaning rate increases were not what many had hoped for.
We’re down to the last few tickets for our Feb 2nd New York ILS conference