Rate increases secured by insurance-linked securities (ILS) funds and collateralized reinsurance vehicles at the mid-year reinsurance renewals are likely to be higher than had been expected when the negotiations began, sources have told Artemis.
Typically, we don’t get any clear signs of price trajectory until after July 1st when the reinsurance broker reports are released, so we expect to start seeing some of these either at the end of this week, or beginning of next.
But these don’t always break-out the rates secured by the collateralized reinsurance market or ILS funds, but this year we’re told the same macro-trends that had driven catastrophe bond spread widening have also been driving prices higher for collateralized reinsurance and retrocession products.
Sources tell us that rates are increasing by anything from 10% to 35% for higher to mid-layers of reinsurance towers, with more significant increases possible in some lower-layers of reinsurance towers, or for those towers that have been loss affected over repeated recent wind seasons.
Here, we’re referring to property reinsurance towers that are largely catastrophe exposed, as those are the targeted programs that ILS funds and other reinsurance investment vehicles are targeting. So this is just a segment of the reinsurance renewals market deal-flow, but the segment most relevant to the ILS market.
Retrocession renewals are seeing similar rate rises, we understand and sources tell us that the increases being seen are very similar, in percentage terms, to those seen in the cat bond market during the peak of the spread widening in May.
While higher rates had always been anticipated for the mid-year reinsurance renewals in 2022, especially for Florida and other coastal and hurricane exposed states of the US, we’re told the increases being secured are higher than had been hoped for.
It seems the same trends that drove spread widening have been affecting broader reinsurance renewals, even down to supply – demand dynamics, as reinsurance capacity has not been as abundantly available as in recent years, while at the same time risk appetites have changed.
This change in risk appetites has been evidenced in capacity terms, especially at the lower-layers of reinsurance towers, or for loss-affected programs, as well as for structural features of reinsurance arrangements, such as aggregate covers, drop-downs and cascading towers.
Which are all where some of the highest rate increases are being seen, at the still to-be-completed mid-year 2022 reinsurance renewals.
Risk appetite is benefiting many sources in the ILS market though, as without fail all of the people we’ve spoken with said they have been taking advantage of market conditions to move further up in reinsurance towers, negotiate higher attachment points, improve other terms that make their deals a little more risk-remote and dial-back further on some of the terms-creep seen across the reinsurance renewals market through the last decade or so.
As a result, ILS fund managers and collateralized reinsurance underwriters have been finding plenty of attractive options for deploying capital this year, it seems.
Those with rated fronts, or their own carriers, feel particularly well-positioned as the mid-year renewals come to a close, we understand.
We also understand that some ILS fund managers may be able to go through the hurricane season less-hedged than in recent years, as the shift to higher layers and attachments, plus improvements in terms, are seen as providing additional insulation to their fund strategies.
Overall, the overriding sentiment we’re hearing from contacts in the marketplace, is one of much greater satisfaction with pricing and terms and positivity about the portfolios being constructed in collateralized reinsurance and retrocession.
As ever, with the hurricane season underway, how that important season pans out will define how profitable ILS portfolios are, or not, over the coming year.
But, some tell us that were any of the recent hurricane seasons to repeat, they would anticipate better fund performance, thanks to higher reinsurance pricing and further-improved terms and conditions.
Which seems like a good position to start the second-half in, although how the coming months play out will be critical.
You’ll notice we haven’t mentioned capital raises at collateralized reinsurance focused ILS funds or structures. That’s because they have been relatively limited, although with some pockets of success seen.
Raising funds for any strategies that have been particularly loss affected, or where trapped capital remains an issue, has been particularly difficult in the run-up to these renewals, we’re told.
The reinsurance sidecar market remains pressured as well, with concerns over potential Ukraine exposures via aviation treaties now in focus and this has made sidecar raises challenging again in 2022.