Rated paper & ILS may be favoured over collateralized UNL retro at renewals: Aon

Retrocessional reinsurance coverage written by rated carriers, as well as other insurance-linked securities (ILS) products such as industry-loss based instruments, may find themselves in favour over collateralized ultimate net loss retro at the upcoming renewals, Aon executives said recently.

Speaking during a media briefing held in place of the Monte Carlo Rendez-vous by the brokers Reinsurance Solutions unit, CEO Andy Marcell and CEO of Aon Securities Paul Schultz implied that there could be a shift in buying behaviour, partly driven by challenges over trapped collateral.

The expectation is that more collateralized retro reinsurance capacity gets trapped at the end of this year, as retro buyers seek to protect themselves against the uncertain levels of pandemic related losses they may face.

Part of this is down to contracts that aren’t so well-defined, or didn’t exclude pandemics fully and so are deemed by their buyers to cover any potential Covid-19 business interruption related losses to their property reinsurance books.

This has led to a situation where, “Reinsurers, as clients if we’re talking retro, are in a very difficult situation because they know that they’re going to have a certain amount of pandemic loss that emerges,” Marcell explained during the virtual briefing.

“They bought retrocession cover from collateralized markets, and they don’t want to release that coverage, that trapped capital, if you will, even though they wouldn’t mind it being redeployed to cover them again,” he explained.

Adding that, “Because, as yet, they can’t with a degree of precision estimate what the ultimate impact to them would be, and how much of that loss would be covered by their retrocessionaires.

“So, that is a really, really difficult decision, and there’s a lot of back and forth and everyone is trying to be as transparent as possible in some very difficult circumstances.”

This could cause some changes in retrocession buying behaviour, the executives explained, which may benefit other parties in the market, including catastrophe bond funds and their investors.

Paul Schultz, CEO of Aon Securities, added, “I think you’re going to see a little bit of a switch in buying. So I think some of the other products that fall under the ILS banner, if you will, will be taken up and utilised a little bit more frequently than just relying on the UNL retro product.”

That could include catastrophe bonds, which tend to provide more named peril based coverage, as well as other industry-loss based instruments, such as industry loss warranties (ILW’s), which also provide more insulation against issues around coverage inclusions.

On the situation the market finds itself in this year due to the pandemic, Schultz said, “If you have the uncertainty that we have in the market today, it’s going to be difficult to release that collateral back to sort of write against it again, if you will. So, there are going to have to be complimentary solutions introduced to be able to address the needs of retro buyers.”

Marcell added, “I think that another outcome of that dilemma will be, that when people are buying retrocession in the future, particularly, 1/1 and beyond, I think the rated paper would have therefore a natural advantage over non rated paper, in that respect.”

Marcell said that his team has been working with Aon Securities to see, “How we can assist some capital flowing back into the retrocession marketplace, because it helps the reinsurers and therefore helps our other customers.”