Capital market investors, through insurance-linked securities (ILS) fund managers and other collateralized underwriters of reinsurance risks, now provide more than 50% of global catastrophe retrocession capacity, according to Guy Carpenter.
The capital markets and ILS investors have been steadily growing their share of the global property catastrophe retrocession market for some years now. In fact the capital markets also has a growing role in other lines of retrocession, such as energy, marine, aviation and specialty risks, as these are often bundled or provided alongside catastrophe retro cover.
Investment managers, such as CATCo Investment Management, have been leading the way on providing new pillar-type retrocessional reinsurance products in recent years, themselves taking an increasing slice of the market.
At the same time some traditional reinsurers, such as Everest Re, have also been growing their share of global retro capacity, both through its traditional pillared ‘Purple’ and subsequent products as well as through collateralized products sold by its Mt. Logan Re sidecar special purpose reinsurance vehicle.
Others that have been providing increasing amounts of global retrocession include Blue Capital Management, the ILS investment manager now owned by Endurance following its acquisition of Montpelier Re, as well as the other usual ILS manager suspects.
This focus on providing better retrocession products and making efficient capacity available has resulted in the capital markets becoming the dominant source of retro capacity, according to reinsurance broker Guy Carpenter.
Commenting on the retrocessional reinsurance market in 2015 and at the key January 2016 renewal season at a press briefing, Chris Klein, Head of EMEA Strategy at Guy Carpenter, said that insurance-linked investors are becoming the dominant force in retro.
“It was a benign year for catastrophes with retro programmes generally not attaching. Insurance-linked capacity was marginally up and it represented the majority of retro capacity. We think the estimated percentage limit of retro placed certainly for cat risk through ILS is now in excess of 50 percent,” Klein explained.
During the briefing Klein discussed the January 2016 renewals, from a retrocession point of view, saying; “The retro market continued to soften but at a slower pace than last year. Most transactions were down by 5% t0 10% on a risk adjusted basis, compared with up to 15% last year.
“That was driven by increased exposure, as full worldwide cover was being offered more generally. There was also greater spread of pricing from reinsurers than in 2015.”
Klein also noted that a little more demand continues to be seen for retrocession, with more defensive buying evident and increased demand for excess of loss or quota share retro cover.
Most retro programs renewed early, Klein said, “in fact much earlier than seen in previous years.” Guy Carpenter also noticed some isolated incidents of clients choosing to switch some of their aggregate protection back to per-occurrence, in order to guarantee reinstatements on that cover.
Catastrophe bond and ILS capacity represented the majority of increased retro capacity, particularly for multi-class coverage and for capacity from new entrants to the market, Klein closed.
Meanwhile Richard Hewitt, Head of Business Intelligence EMEA, added that one of the main factors thought to contribute to the slight decline in traditional reinsurance capital during 2015, while ILS capital continued to grow, was traditional reinsurers buying more retro cover from ILS sources.
Retrocession has always been a key piece of the catastrophe bond market, with reinsurers using cat bonds as a way to transfer peak exposures to the capital markets. Now the collateralized retrocession product has helped the ILS market to grow its share of global catastrophe retro to over 50%.
Further growth is likely, as traditional reinsurers opt to use the efficient capital from ILS players as a preferred source of retrocession. It’s expected that the percentage ceded to the capital markets will increase.