Retro market prices continue to soften, capacity shortage noted: Willis Re

Non-marine retrocession rate movements at mid-year renewals maintained the softening trend witnessed during the April 1^st renewal season, and with the majority of reinsurers having fully deployed their capital the sector has encountered a capacity shortage, says Willis Re.

Non-marine retrocession rates fell by -10% for both loss free accounts and catastrophe loss free accounts at the recent June/July renewal season, while loss hit accounts witnessed rate increases of +15%, according to Willis Re.

The reinsurance broker notes, in its Willis Re 1^st View July 2016 publication, that year-on-year, price reductions in the global non-marine retrocession market were in line with reductions seen at the January and April renewals.

Artemis discussed earlier this year how rate increases of 15%+ for non-marine retrocession loss hit accounts, suggested that a retro pricing floor could be nearing, but with similar movements at mid-year renewals on both loss hit and loss free accounts, it appears a floor is yet to be reached.

Excess reinsurance capacity from both traditional and alternative sources continues to contribute to persistent rate declines and market softening in the global non-marine retrocession space, exacerbated by the prolonged benign loss environment.

At the beginning of 2015 Willis highlighted how the very soft retrocession market created certain arbitrage opportunities for underwriters and protection buyers, offering those in the retro space with some form of respite from the softening landscape.

Since the beginning of 2015, the retrocession and wider reinsurance marketplace has continued to soften, with Willis Re reporting that during the April 1^st renewal season non-marine retrocession rate movements continued to decline for loss free accounts by 10%, the same decline witnessed at mid-year.

During the key June/July renewal season non-marine retrocession buyers were seen to purchase additional cover as underlying portfolios expanded, says Willis Re. However, placements covering U.S. windstorm are encountering a capacity shortage, warns Willis Re, as the majority of reinsurers are fully deployed, at current market pricing.

This could be down to reinsurers, and insurance-linked securities (ILS) funds/managers that access the non-marine retro market via reinsurers or directly, simply deploying their capacity earlier on in the year, and ultimately not having the means to access the space at mid-year renewals.

Furthermore, ILS players and reinsurers alike have been seen to pull-back on areas during the softening cycle, such as U.S. wind, where pricing is deemed too low, seeking to deploy capacity into less pressured, more attractive business lines.

It’s also possible, should the market continue to soften, that a demand issue could impact the non-marine retrocessional market in the future, as reinsurers and ILS players refuse to take on business that is too high risk for too lower return, although this doesn’t seem to be an issue in the near-term.

Willis Re’s report doesn’t provide a rate movement percentage for non-marine retrocession catastrophe hit accounts, suggesting that any cat events that occurred in the period weren’t significant enough to move rates.

The reinsurance broker did stress that the Fort McMurray, Alberta, Canada wildfire event would likely impact retrocession programs for buyers with a large market share in Canada, so it’s possible that those firms will feel the hit later in the year.

Furthermore, reinsurers and ILS funds could have reserved for the Canada wildfires, so there is a possibility that losses will come through although again, it appears no cat losses impacted the non-marine retrocession market enough to shift rates.

Willis Re also added that there was evidence of continued pushback on the widening of terms and conditions (T&C) in the sector at mid-year, particularly regarding cyber cover.

Rates in the global reinsurance and retrocession market continue to soften, and despite a slowdown in rate declines during mid-year renewals, Willis Re notes that the deceleration in declines is far from widespread.

Reinsurers and ILS funds/managers are increasingly seen to pullback on lines that aren’t attractively priced, a trend that is impacting both the reinsurance and non-marine retrocession marketplace.

With the benign loss environment persisting and further rate declines expected further into 2016, along with the continued rise of ILS, it will be interesting to see how pricing in the non-marine retrocession market reacts, and whether other business lines outside of U.S. wind start to witness a capacity shortage, also.

Also read:

– Reinsurance softening slows, but not widespread, capacity withdraws: Willis Re.

– ILS funds more aggressive on pricing in second-quarter: Willis Re.