A combination of forces coalesced in the second-half of 2020 which served to reduce demand for retrocession capacity at 1/1, resulting in a less constrained marketplace than initially expected, according to James Vickers, Chair of Willis Re International.
In the retro market at the key, January 1st, 2021 reinsurance renewals, “you had a combination of things going on,” explained Vickers, in an interview with Artemis around the launch of the reinsurance broker’s latest 1st View report.
At the mid-point of 2020, market participants appeared nervous and viewed the retro market with a degree of apprehension amid a reduction in capacity arising from trapped capital and elevated pricing.
“You had some buyers looking at alternative sources such as publicly traded cat bonds; some buyers being astute at sourcing additional capacity, quota share capacity or sidecar capacity; and others looking at the original business improving, and notching up their risk appetite, saying actually, we don’t need to buy so much, we’ll retain a bit more,” said Vickers.
Adding, “And, so, all of those things coming together did produce a reduction in the amount of retro demand, at a time when in reality, the ILS funds and trapped capital issue whilst being a problem wasn’t as bad as originally thought.
“Additionally, you’ve got the traditional reinsurers beginning to allocate some more capital to retro. So, the supply / demand dynamic was not as far out of kilter as people thought it was going to be four or five months ago.”
He continued to highlight the interesting new phenomenon of publicly traded catastrophe bonds giving retro capacity; a trend which was evident in the beginning of the third-quarter.
“There was a very clear strategy, from some buyers looking at the retro market thinking it was going to be difficult in 2021. So, the product, occurrence based named perils retro cover, whilst it is not as attractive as what they were buying in the form of aggregate covers from ILS markets as that product was not going to be available, cat bonds were a reasonable option,” he explained.
As shown by the Artemis Deal Directory, catastrophe bond issuance broke records in 2020, both in terms of the number of transactions and the total value of issuance.
Looking ahead to 2021, Vickers told Artemis that it could well be another record year for the catastrophe bond market.
“I think what’s interesting in the ILS market is that there’s been this move back towards publicly traded cat bonds, because of a) liquidity for the investors, and b) they tend to be quite straightforward by their design, in terms of coverage. So, yes, there may be more demand for that.
“The key is whether the traditional reinsurance industry will provide product that is more attractive to some of the issuers, that’s what it boils down to. Historically, there was a leveraging effect, the ILS markets were prepared to write product that traditional reinsurers weren’t prepared to support a few years ago. Well, that game is over, the ILS market has worked this out and is now more closely aligned to traditional markets in terms of coverage and pricing . But, let’s wait and see.”
We also covered retrocession renewal market dynamics in these recent articles: