Early retro renewals suggest “significantly better expected returns” – KBW

Some of the earlier and larger retrocessional reinsurance programs in the market have received their firm orders or are completed, with indications that suggest rates are increasing even for some of the largest and most respected reinsurers in the market, suggesting much better returns are available for writing this business.

The read-across to the insurance-linked securities (ILS) market is that those writing collateralized retrocessional reinsurance within their ILS funds are likely to secure much more favourable pricing.

While those providing retrocessional type capacity on a flow basis through quota shares, reinsurance sidecars and other structures, are also likely to be seeing much improved pricing at the January 2021 renewals.

There’s also a read-across to the catastrophe bond market, as a number of the transactions in the market now, or set to come to market towards the end of the year and into early 2021, are providing their sponsors with retrocessional capacity.

So the results of major reinsurer retro programs suggesting that rates on these new cat bonds will also be higher than would have been seen a year ago.

They also suggest that the catastrophe bond market may offer a well-priced alternative for some retro buyers right now, enabling them to lock-in multi-year pricing from a diversified and efficient source of capital.

Reports and sources suggest retro rate increases are in the double-digits, even for some of the world’s largest reinsurance firms, SCOR and Munich Re being two cited by analysts this week. So, size of counterparty, their results and even the length of relationships, does not appear to be moderating price increases too much in the retro space.

The fact major reinsurers such as SCOR and Munich Re, among others, are seeing firm order terms that include significant rate increases on their annual retro reinsurance placements, while some have also had to actively restructure certain elements of their programs to secure more favourable pricing, bodes well for market expected returns in two ways.

First, that these major reinsurers are subject to price increases of the amounts being discussed, double-digits to 20%+, suggests that smaller insurers and reinsurers are going to also be subject to steep increases for reinsurance and retro coverage at the upcoming renewals.

Companies such as SCOR and Munich Re are about as well-positioned as any to fend off the price ambitions of their retrocessionaires, which will include a significant amount of capital market and ILS fund participation. But if they too are bowing to rate demands in order to secure sufficient protection for next year, then smaller re/insurers will potentially be subject to even greater increases at 1/1.

Secondly, with these major reinsurers paying more for their own retro protection, it will encourage them to push for more rate from their reinsureds as well, helping to sustain the price increases more widely across the market going into the renewals.

A third factor of relevance to the retro space is becoming clearer as well, as the renewals approach.

Numerous sources are suggesting demand is up for retrocession, in some quarters of the marketplace, and that this is driving some interesting opportunities as cedents look to fill gaps in their protection that have emerged after the drying up of certain products such as pillared protection.

This dynamic began to be seen last year and it looks like into 2021 more of the same will be visible, as retro buyers look to find capital efficient structures and solutions for their programs.

This element of restructuring also bodes well for enabling other products to compete on a more level playing field, such as the catastrophe bond with its named peril focused coverage.

With retrocession pricing clearly harder and perhaps still hardening, especially as COVID losses continue to rise as was announced by Munich Re today, there is also a chance this hardening persists.

It will be interesting to see what this means in the sidecar market, many of which provide retrocessional quota share capacity to their sponsors.

Some reinsurers may look to upsize on their quota shares, alongside their traditional excess of loss retro, in order to satisfy their protection needs, which may present an opportunity for the sidecar and quota share focused ILS fund managers and investors.

One final point to note, is that volatility is increasingly seen as negative and something to be smoothed out, which can make retrocession even more important and also raise demand for certain forms of retrocession as well.

As catastrophe losses, along with severe weather, remain challenging, even though lower in 2020. The re/insurers will be looking at ways to structure both reinsurance and retrocession programs so that they can reduce volatility and provide more stable results going forwards.

Analysts at KBW commented on the retrocession renewals, saying that the early signs from the major programs and the expected reinsurance renewals ahead all “translate into significantly better expected returns” for those writing these types of business, such as the Bermuda market.

This reads across to the ILS market as well, given the focus on property catastrophe risks and also the ILS market’s participation in global retrocession, so this is another potential signal for the better ILS fund and structure return potential that lies ahead.

Also read: Rate rises + tighter terms + dislocation + quality cedes = higher ILS return potential.