According to leading reinsurance brokers, the market for retrocessional reinsurance coverage saw pricing declines of as much as 25% at the recent January reinsurance renewals.
A converging of factors, including oversupply of retro capacity as the well-capitalised reinsurance market saw record new capital inflows, price declines in the wider reinsurance market and new entrants, all contributed to significant price declines.
This resulted in a buyers market for retrocession, according to Willis Re, with excess capacity from insurance-linked securities (ILS) funds, sidecars, reinsurer-backed funds and traditional retro reinsurance vehicles driving competition in this niche segment of the reinsurance market.
The competition was also driven by concern at reduced income from inwards reinsurance, helping to further stimulate pricing declines and rate reductions in retrocession. According to Willis Re retrocession renewals saw risk adjusted rates decline by between 5% to as much as 15%, across all loss free lines.
As well as these significant price reductions, Willis Re reported relaxation of minimum and deposit premiums, from 100% to 90%. There was also some relaxation of terms and conditions, with retrocession providers increasing the availability of worldwide, aggregate and composite covers.
Large, privately transacted retrocession deals helped to increase the pressure on signings, said Willis Re. This will have particularly been a concern for some traditional retro reinsurers, as Artemis is aware of reports that some collateralized retrocession providers have been seeking to secure large layers for themselves before they hit the broader market.
Reinsurance broker Guy Carpenter said that some retrocessional reinsurance pricing had dropped by as much as 25%, particularly in the U.S. market. Nick Frankland, CEO of Guy Carpenter’s EMEA operations, said at a recent press briefing that there is more retro capacity than can currently be used in the market.
Frankland continued, explaining that the availability of ultimate net loss (UNL) indemnity protection is key for retrocessional reinsurance in the current market. Basis risk remains an issue in the retro market, he explained, and this is one factor contributing to the decline in index triggers in the retro market.
Frankland said that, in retro, UNL capacity is currently fighting off industry loss warranties (ILW’s), catastrophe bonds and other alternative retro structures. Frankland also suggested that retro is a market where alternative capital has been making big inroads.
The industry loss warranty (ILW) market has seen a contraction in trading, versus the growth in collateralized ultimate net loss reinsurance and catastrophe bond issues. This was a feature of 2013, a slow decline in ILW use, which may be a reaction to a lack of U.S. catastrophe losses particularly from hurricanes.
The market has seen a number of sidecar launches in the last few weeks, many of which will provide retrocessional capacity to their sponsors, showing that the third-party capital collateralized sidecar remains a popular vehicle for transferring retrocessional risks off-balance sheet.
Read more of our January 2014 reinsurance renewal coverage: