The Covid-19 pandemic is proving to be a catalyst for an expected broad hardening of reinsurance and retrocession markets it seems, with brokers expecting rates to move largely in unison as the financial impact to carriers appears likely to hurt all corners of the market.
But one area of the market that had already been hurting and where hardening of rates could well be accentuated as a result, is global retrocessional reinsurance.
In recent years, this is an area of the reinsurance market where capacity has been severely dented by repeat catastrophe loss years, as well as the removal of one major player on the catastrophe retro side and a pulling-back of appetite among many others.
In addition, the general slowing of inflows into the broader insurance-linked securities (ILS) market has also hit the retrocession space, piling on additional pressure at a time when the market’s perception of risks has also risen thanks to the aggregation of catastrophes in recent years.
Enter Covid-19, a health pandemic with tragic global consequences and perhaps the final straw that will drive a significantly harder retrocession pricing environment.
Reinsurance broker Willis Re commented on the outlook for retrocession recently.
“COVID-19 is proving to be a further catalyst for all round market hardening, almost irrespective of line of business,” the broker explained.
Adding that, “Traditional retrocession capacity remains relatively unaffected in terms of available capacity for renewal business, but there is increasing concern of whether COVID-19 losses will filter through to the reinsurance and retrocession market given the mainstream press coverage on BI losses to the direct insurance market and the emerging political situation.”
But with impacts being felt much more broadly across insurance and reinsurance markets and only beginning in many cases, there is an expectation that the retro market could firm considerably at renewals over the coming months.
Willis Re highlights that the majority of retrocession programs renew at January 1st, with some also renewing at April 1st and just a handful at the mid-year.
So, retro protection buyers looking at renewals now in 2021 will have some time to absorb and understand the full magnitude of the impacts of Covid-19, while those renewing in June and July will not.
“Midyear reinsurance renewals in Florida and the small number of retro placements occurring at this time, however, do not have such luxury,” the broker said.
It is the broader re/insurance market impacts of Covid-19 that may end up forcing a broader hardening, across both reinsurance and retrocession, as pressures on both sides of the balance-sheet could result in pricing being forced higher.
“Working capital is seemingly becoming a bit scarcer. Balance sheets have taken losses on the asset side; share buybacks have been put on hold, and reduced liquidity in financial markets is resulting in cost of capital going up for reinsurers,” Willis Re explained.
As cost-of-capital rises for reinsurers, so it does also for retrocessionaires and if reinsurers are pushing for harder pricing movements at their tier in the market, it stands to reason retro providers will as well.
“The emergence of COVID-19 is broad enough that it is now more than merely conceivable that it might exacerbate market hardening in the non-life segment,” Willis Re said.
Importantly, the catastrophe risk market could find itself in demand, as re/insurers hit by the pressure of Covid-19 could find they need to better protect their balance-sheets in 2020, given the expected hit to their capital and the potential for ongoing losses from the pandemic.
This may raise the need for catastrophe risk protection more than in recent years, as companies won’t want to be retaining more exposure than their capital can bear, but at the same time they won’t want to relinquish hard-won positions on renewing programs.
Willis Re explained, “Key participants in the catastrophe risk sector of the commercial (re) insurance sector will themselves need to assess their ability to maintain portfolios of risk whilst assessing the true cost of capital and required returns.”
The broker also noted that some catastrophe risk underwriters may also have to look to hedging their books, to offset how their capital position now finds itself.
“Those that have deployed capacity in the sector may consider hedging strategies using index products and the like,” Willis Re said.
Which again points to a potential need for greater catastrophe reinsurance and retro capacity this year, that alongside the potential for the market to harden even more may present an attractive market position for insurance-linked securities (ILS) investor entry.