- Retro buying continued to shift from collecting to happening
- Moody’s estimated that at 1.1 2022 UNL, total retrograde capacity decreased by 75%.
- GC said buying was up 13% in the middle of the year but down 39% overall.
- In 2022, prices will increase by an average of 13%, while the total will increase by more than 20% (when available)
- Aon reports a “significant increase” in ILW trading as customers look for alternatives
The term “U-shaped market” was a term coined to describe the solidification of the primary property insurance market and the reactionary property market as property reinsurance pricing was delayed.
But the downsizing we are now observing in property reinsurance – which caused a capacity crunch in the middle of the year and is likely to lead to a difficult renewal on January 1 – is unlikely to be reversed by the advent of any renewed retroactive support.
In his most recent sector report last week, Jay Carpenter noted that the upward pressures in the reactionary real estate market seen on Jan. 1 have continued into 2022, with capacity for aggregate and low-correlation layers remaining tight in contrast to lower supply constraints. Layers at the top of the tower.
Rival Aon added that the retrospective market “continued to contract” in 2022, with increased prices and higher retention rates, prompting reinsurers to turn to the ILS market as an alternative source of retro protection.
This was supported by Moody’s reports that reinsurers are increasingly relying on cat bonds and sidecars for retroactive protection amid contractual guaranteed aggregate capacity affected by the rampant issue of trapped capital.
According to the rating agency, reinsurers have sponsored 15 cat bonds since June 2021 to reach old capacity, providing a $2.85 billion limit.
The company also reported that upon entering its January 2022 renovations, an estimated $15 billion to $20 billion of alternative capital was held, a large portion of which was earmarked for total retroactive coverage.
This means that UNL’s total retroactive capacity was estimated at around 75 percent “and it was very difficult to place it as investors showed little interest in reloading capital”.
Aon said there has also been a significant increase in the trading of Industry Loss Guarantees (ILWs) this year as reinsurers look for alternatives (see below).
In his report, Guy Carpenter highlighted some of the dynamics driving the downturn from the old traditional product, including the ongoing period of cat losses since 2017, rising climate concerns, inflation, and modeling challenges.
In a presentation as part of a pre-Monte Carlo Randy Vaux briefing, the reinsurance broker described a gradual tightening that waned buying appetite mid-year.
Purchase of retro products continued to shift away from aggregation as the overall purchase limit was down 4 percent year over year.
Purchase when it occurs increased by 13 percent, but overall purchase decreased by 39 percent amid limited product availability.
Jay Carpenter reported that ILS’ ability to back-up was down 17 percent overall, with withdrawals varying by fund. At the same time, the rated capacity actually increased by 5 percent.
The impact on pricing has been an average increase of 13 percent for occurrences in 2022, and more than 20 percent for overall coverage where available and purchased.
“Retro amplitude will remain somewhat limited for macro and low-correlation layers per iteration, despite the reduction in physical risk in 2022,” James Boyce, chief executive of global specializations at Jay Carpenter, said pending the January 1 renovations.
By contrast, the “generally positive performance” of the mid- and upper-middle-level reactionary occurrence layers would remain attractive to markets looking to deploy capabilities, he predicted.
Boyce suggested “buyers will look for a balance between spending and retention levels, backed by improved core business terms and conditions.”
ILW Trading Spurs
In its latest report on navigating reinsurance renewal, Aon said it saw a “significant increase” in trading in the ILW market during the 2022 renewal cycle as customers look to make the most of capacity availability.
Buyer motivation came from several factors, including increased UNL traditional retro market holdings, cross-curve pricing considerations – particularly at the tail – additional capital-related limit demand, and hedging strategies by ILS funds and putative reinsurance portfolio managers.
The company noted that in the first quarter there was strong interest after the January 1 replenishment, but the bid-ask spread remained too large to link some of the new trades.
This differential narrowed in the second quarter with the availability of alternative capacity from the ILW market combined with increased demand, with trade accelerating.
“PCS also released an estimate for Hurricane Ida which was considered modest relative to industry expectations. This released previously ‘trapped’ capacity that became available for reinsurers to redeploy to other ILW deals,” said Aon.
Increased trading continued into the third quarter, with early deal execution driving year-over-year prices down 30-40 percent for some.
Aon reported that ILW pricing has widened across the curve nearing a renewal on July 1 as capacity becomes more limited.
At the same time, rising cat bond spreads have caused investors to show a preference for those issues rather than ILWs, leading to lower supply at the end of the curve for wind and earthquake risks. The overall capacity also remained limited.
In the report, the reinsurance broker said there is a renewed interest in supply and demand for ILWs distributed at the county level to supplement traditional reinsurance programs that have seen an increase in retentions or a significant increase in rates with capacity challenges.
This has been seen in Florida, where there has been business activity for the state’s low-link ILWs.
“We anticipate continued market momentum throughout the windy season and in preparation for the upcoming renewal season on January 1st,” the company said.