Retro softened through 2021, with ILW prices down materially: GC’s Cook

The retrocession market failed to harden as hoped for through 2021, with in some cases rapid and material declines in pricing seen, especially in industry loss warranty’s (ILWs’), according to Guy Carpenter’s Sebastian Cook.

Speaking during a recent media briefing, Cook, who is Head of London, Europe at reinsurance broke Guy Carpenter, provided some insights into the property market, both treaty reinsurance and retrocession.

The retrocession market has been in-flux for a number of consecutive renewals now, with capacity having evaporated for certain aggregate products the industry had become accustomed to relying on and while replacements were available, the structures did not always suit and so dynamics have been evolving quickly across retro buying of late.

Cook highlighted that in the property retrocession market, “Renewals have been closely watched since 1/1, as some observers expected hardening market impacts to be significant.”

While there has been consecutive renewals of rate hardening in retrocessional reinsurance since 2017, something which Cook said should not be overlooked, he highlighted that the market turned in 2021.

“Pricing momentum slowed closer to 1/1, and through the mid year renewals, with risk adjusted decreases on some of the placements,” he explained.

Adding that, “Ultimately, supply and demand dynamics did not support the rate increases initially targeted by some reinsurers.

“Softening was driven by demand reductions and increasing supply of UNL excess-of-loss capacity, as well as the availability of index products.”

One area supply was not so strong though, was in aggregate excess-of-loss retro, on a UNL basis, which Guy Carpenter sees as down roughly $1.25 billion.

Rate changes reversed, from positive increases of as much as +15% at the January 2021 renewals, to declines of -5% to -7.5% at the mid-year 2021 renewals, in the retro excess-of-loss space.

However, positively for buyers, Cook noted that, “Pricing divergence, between aggregates and occurrence, also stabilised. ”

The retro quota share market remains in-flux it seems, although Cook pointed out that, “demand continues to outstrip supply for rated and collateralized products,” in this segment.

That suggests demand for reinsurance sidecars may increase, as this is one way a reinsurer can lock-in investor appetite for retrocessional access to catastrophe risk-linked returns.

In the industry loss warranty (ILW) market, dynamics also quickly adjusted as 2021 progressed.

Cook explained that, “For ILW’s, the early 1/1 renewals, showed around 5% increases in price, before declining rapidly and materially as an orderly retro market emerged.”

In fact, Guy Carpenter estimates that aggregate ILW pricing declined by -15% to -22.5% at the mid-year renewals and occurrence ILW pricing by -17.5% to -30%.

These steep declines in index-trigger ILW pricing will have been partly in response to demand from ILS funds and investors for these products, alongside catastrophe bonds, which have driven softening across index-based risk transfer products and other securitized reinsurance instruments in recent months.

Looking ahead, Cook said that retrocession market conditions will remain exposed to capacity levels, as well as to catastrophe losses.

We suspect retro market conditions will also depend on investor demand for ILS going through the rest of this year and into the renewals.

“While supply continues to exceed demand in Q3, dynamics could change quickly dependent upon wind season activity,” he explained.