Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

$9 billion of collateralised retro estimated blown or trapped


Of the $29 billion of total retrocessional reinsurance capacity tracked by broker Aon, an estimated $9 billion, or 31% is collateralised and either completely blown or trapped as a result of recent catastrophe events, according to Robert Bisset, Chief Executive Officer (CEO) of Global Re Specialty, Aon Benfield.

Following the devastating effects of hurricanes Harvey, Irma and Maria on parts of the U.S. and the Caribbean, Aon Benfield executives discussed the impacts to the global reinsurance and alternative capital markets, including the retro space, which has been widely debated since the storms.

Bisset explained how the retro market has been very prominent in discussions since the events, and underlined the importance of the market in supporting traditional reinsurers as well as to the expanding alternative reinsurance capital space.

Collateralised reinsurance capacity is active in the retro market, and has fast become the largest sub-sector of the insurance-linked securities (ILS) space, making up the largest portion of dedicated capital after the expanding catastrophe bond space.

According to Aon Benfield’s estimates, which includes tracked first and subsequent event limits across industry loss warranties (ILW’s), ultimate net loss (UNL) and direct & facultative (D&F) retro coverage, roughly $20 billion of total retro capacity that it tracks has been impacted by the three hurricanes, with approximately $9 billion of collateralised retro limit being impacted, either trapped or blown through.

This estimate is higher than others that we have heard from market sources, but Aon Benfield probably has the best view of the overall retro market size, given its reach, and therefore the impacts of recent hurricane events.

Furthermore, since hurricane Harvey hit Texas, approximately $2 billion of event traded limit has been transacted, so live and dead cat capacity.

Bisset said that over 50% of retro market transactions are executed directly with fully collateralised markets and, five of the top ten retro markets in the world are collateralised players, and the top ten markets account for roughly 60% of the total market limit.

With this in mind, supply of retro cover could be hit at the upcoming January 1st, 2018 renewals season, if collateralised players fail to recapitalise, but, according to Bisset, all collateralised markets appear confident that they will be able to raise the capital needed.

Evidence emerged this morning to this effect, as retro focused ILS specialist fund manager Markel CATCo announced a $1.8 billion plus capital raise in order to meet cedent demand at the key January renewal season.

Other collateralized retrocession providers will also be actively raising funds to ensure they can provide continuity to their ceding clients.

Furthermore, Bisset said that a number of rated carriers have expressed an interest in providing retro capacity, which could cover any shortfall from collateralised markets at 1/1. Of course this will also ramp up competition significantly as well, dampening any expected price rises.

Demand for retrocession could also be up at 1/1, but Bisset stressed that this will largely depend on cost, which could be a mitigating factor.

The January renewals is an important time for the retrocession markets, with around 75% of retro business renewing. However, in light of recent events and the continued gathering of loss information, Bisset expects negotiations will take time and the renewals are likely to complete late this year.

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