Retro issues moderated by new capital, leaving disappointment for some

The expected capacity shortage in the retrocessional reinsurance market did not materialise to the degree anticipated at the January 2021 renewals, resulting in a market that still firmed considerably, but did not experience the hardening many had been hoping for.

New capital has played a role here, in moderating the eventual rate increases seen across the global retrocessional reinsurance renewal market at 1/1.

As we explained in this article, broking group Howden estimates that non-marine catastrophe retrocession pricing rose by around 13% on a risk-adjusted and average basis, across the January 2021 renewal.

Howden acknowledged that capital inflows into retrocession served to cap the renewal pricing below where it perhaps could have been.

In our article on the role of third-party capital and collateralised capacity at this January renewal season, we explained that there has been some disappointment in the retrocession market as a result of certain pockets of capital being introduced into that space.

Howden, it is new report, has explained that by its reckoning retrocession pricing has risen by roughly 50% since its low point in 2017, thanks to the 13% increase this January.

That takes retro pricing back to levels that are significantly more comfortable for many underwriters that had pulled-back on the segment, especially as risk has also reduced in many towers and structures as well.

In fact, given what we’re hearing about the way retrocession has been purchased at this latest renewal, it’s possible the risk-adjusted increases are even higher for those building portfolios of retro reinsurance for investors and stakeholders.

But still, the increases aren’t what they could have been and as ever there are some specific players called out for being too hungry to absorb key retro layers at pricing some deem to be too low.

In its renewals report, broker Willis Re noted that retrocessional reinsurance was an area that had been expected to face capacity shortages, but that wasn’t really the case in the end.

While retrocession capacity remains down somewhat, the capacity for retrocessional reinsurance renewals remained largely adequate to satisfy demand at 1/1, Willis Re said.

At the same time, demand for UNL retro actually dipped, Willis Re believes, with as much as a $1 billion decline in UNL retro demand seen, the broker estimates.

Some of this may have been due to the higher levels of activity in the catastrophe bond space, with a number of retro cat bond transactions coming to market during a record fourth-quarter of the year.

It’s also down to dynamics in how retro has been purchased, as reinsurance firms adjust to the reality of certain pillared retro products having evaporated from the marketplace.

Some ceding companies have been willing to retain more exposure as well, while others have looked to quota shares and collateralised reinsurance sidecars (private and more broadly syndicated).

With these market dynamics, of dented but still sufficient capital operating in a retro market that displayed less demand, you’d have thought most underwriters would have been satisfied with rates and increases would have held through to the end of the year?

But this wasn’t the case and for certain layers, particularly of property catastrophe retro reinsurance towers, we understand some markets see the end result as a little disappointing.

Some of the stalwart collateralized reinsurance and retro fund managers are among those that had been hoping for rate momentum to be sustained right through to the renewals.

But their hopes were dashed in part by a larger appetite from the likes of RenaissanceRe, who we’re told has been particularly active again in retro, as well as the much-discussed Acacia start-up that came to market in the final weeks.

Acacia, which is the name we’re told the retrocession start-up launched by experienced market executives Simon Fascione and Charlie Fry is going by, is a particularly interesting case.

We’re told that Acacia’s capacity, which at this time remains uncertain as to just how much backing the vehicle could get in time for 1/1, but is said to be in the hundreds of millions, has been solely brokered by Aon, sources said.

As a result, Acacia retro capacity has been brought to some of the retro towers brokered by Aon and either taken share other players had been hoping to secure, or is thought to have dampened pricing somewhat, retro market sources explained to us.

It seems market perception of a start-up like Acacia is that it was largely Aon driven, rather than by its founders and is seen as the latest attempt to bring greater control to a key marketplace for the brokers clients.

In fact, over the years there have been numerous retro players, particularly on the collateralised side, that have been linked to sole or majority broker relationships and have ended up acting as a kind of facility for capacity largely dedicated to one brokers’ clients, also providing brokers with another lever for winning new client relationships.

As such, it’s not unusual in retrocession for there to be start-ups with strong broker alignment, but in a market that many had been hoping would harden more than it has, it’s bound to result in some consternation.

In reality, Acacia, the elevated retro appetite of players like RenaissanceRe, some higher levels of quoting again by players like D.E. Shaw (once again said to have been much more active, although how much it bound is never clear), plus increased appetite from some traditional players, all combined to dampen retro renewal momentum it seems.

Alongside this, the catastrophe bond market which, while separate in many ways, plays a role in how pricing moves in retrocession, as UNL retro markets have to compete with its efficiency and the final weeks of the year made cat bonds look extremely good value for some retro buyers.

Topping it all off, some traditional reinsurers are understood to have written much more retrocession at this renewal season as well.

So, it was hardly a flood of new capital coming into the retrocession space this renewal season.

But when capacity was relatively sufficient anyway and the cat bond market was firing on all cylinders, it’s been enough to moderate the issues many expected retro renewals would face, ensuring they largely cleared in an orderly and timely manner, but that some were left a little disappointed by the outcome.

Read all of our reinsurance renewals coverage here.