Retro lacking competition, but ILW’s still attract investors: Gallagher Re

The market for retrocessional reinsurance lacks competition and this has been a factor in rapidly rising prices for that type of protection, broking group Gallagher Re has suggested.

The retrocession market has faced significant headwinds in recent years, thanks to significant losses and the loss of one of the biggest players in the space, as well as the general shift away from aggregate coverage and moves up in terms of attachments.

Risk aversion among those deploying retrocessional capital means that competition has not been as strong as you’d traditionally see in the retro marketplace, which means pricing can therefore rise to a level where the market more naturally settles.

Gallagher Re noted of retrocession markets in its recent renewals report that retro placements experienced a demanding renewal season, particularly regionally.

“Capacity shrunk, competition between leaders was non-existent leading to considerable increases in prices despite increases in retention levels and decreases in the limits purchased,” the broker explained.

Catastrophe excess of loss renewals were challenging globally at the renewals, it seems, with retro again one of the most challenged segments.

The retro renewals were later than seen in recent years, with delayed negotiations as reinsurers finalised their approaches to the Florida market and so what protection they needed to buy, Gallagher Re said.

Earnings level cover was increasingly limited by a lack of capacity, with limited capital inflows to the retrocession space.

But existing supporters of the retro market stayed consistent and attachment, as well as peril coverage remained a focus, the broker said.

Markets continued to heavily scrutinise secondary peril exposure, while named peak peril opportunities remain the favoured risks for retro markets.

At the same time, inflation was as important a topic for retro renewals as it had been for the broader mid-year reinsurance negotiations.

One area of the retrocession market that remained attractive to capital was industry loss warranty (ILW) opportunities, Gallagher Re said, but it noted that pricing pressures were experienced at lower attachments.

As we previously reported, weighted industry-loss warranties (ILW’s) have made a return in the constricted retro market, increasingly a popular choice for protection buyers it seems.

The lack of competition in retrocession renewals, driven by both the lack of capacity and markets ability to just sit back and see what pricing can be achieved, has undoubtedly driven rates higher in the segment.

A functioning market needs competition, in order to find real clearing prices. But in a broker driven market that remains relatively small, and where capacity is happy to sit back and wait for bids to come in, the result could have been more hardening than perhaps was really necessary, making for an attractive opportunity for those with capital to deploy.

As we also recently reported, improved conditions in retrocession drove hedge fund manager K2 Advisors to cite the segment as an area it wants to be “strongly overweight”.

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