Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Trapped ILS capital & lack of retro not as big a renewal issue as expected


As the January 2020 reinsurance renewals fast approached the two issues of trapped ILS capital and dented retrocessional capacity proved not to be as big or impactful as anticipated, with the market still managing to clear, partly thanks to the increased appetite and re-entry of large traditional players.

trapped-collateral-mousetrapThe January 2020 reinsurance renewals started off particularly slowly, with market’s holding back bids and some early placements struggling, particularly in severely loss affected regions or on aggregate retrocession layers or programs.

Everyone had been anticipating a challenging renewal, but perhaps more challenging that it actually turned out to be.

The issue of trapped collateral and capital from insurance-linked securities (ILS) funds and other third-party capital backed reinsurance vehicles was expected to be a key driver for the renewals.

In the end this definitely drove rates, as you can see from where pricing moved that many of the locations and lines of reinsurance business were those where ILS funds had a particularly large influence.

The other issue of dented retrocession market capacity, which of course is also related to the above, was also a driver of rates, particularly for aggregate retro renewals and loss affected layers. Again, the effects of this is clearly evident in where rates have risen the most.

But neither of these factors has proven as detrimental to ceding companies renewal ambitions as had been anticipated, with most finding adequate capacity available and prepared to pay the price for it. While areas of the market where capacity was particularly absent, again such as aggregate retro, saw ceding companies managing to secure sufficient coverage to get them through, or alternatives to tide them over.

Explaining how it saw these factors at the January renewals, reinsurance broker Willis Re said, “While capacity was anticipated to be impacted, owing to trapped ILS capital and a lack of retrocession availability, capital supply was still sufficient to meet demand.”

In fact, the broker noted the return of some retro capacity providers to the market that had been drawn in by the available price hikes.

We were the first to report a few weeks ago that both Berkshire Hathaway and DE Shaw returned to the retro market as the renewal approached, actively quoting and also binding some layers.

In addition, major reinsurers such as RenaissanceRe displayed an increased appetite for retrocession and fellow Bermudian Everest Re had been deploying capacity using its Purple pillared retro product, we understand.

Willis Re said this helped the renewals clear, as, “Significant retrocession providers returned to the market in the last two weeks.”

It’s a testament to the maturity of the ILS market that it continued to offer capacity at pricing commensurate with where ceding companies were willing to pay, despite the impacts of trapped capital that continue to affect ILS funds and other collateralised players.

It’s also testament to the rate increases achieved at renewals that these major retro capacity players have found rates attractive enough to return to the market at this time.

Overall, the reinsurance and retrocession markets have functioned well, despite the effects of trapped capital and the shrunken retro capacity base.

Going forwards into 2020, it will be interesting to see whether the market can set a new pricing floor, based on the higher rates achieved. Or whether once the capital base replenishes itself we begin to see some slow softening once again.

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