Hard but stable retro market expected at 1.1

Following significant dislocation in the property retro market over the last couple of years, a degree of stability has returned to pricing, albeit with overall available capacity at reduced levels and no sign of capital entering the sector at any scale that will meaningfully alter dynamics for buyers at the upcoming 1.1 renewal.

Sources have pointed to some increased retro appetite from traditional reinsurers such as Everest and Sompo International on the ultimate net loss (UNL) side, while Securis is understood to be allocating a portion of its recent committed capital raise of up to $1bn to low rate on line retro.

Other ILS funds spoken to by this publication have suggested they may show an increased appetite for retro UNL and potentially even quota share – where capacity has been hard to find – depending on the relative attractiveness of cat reinsurance as they make allocation decisions.

And brokers have been suggesting that some degree of competition is beginning to emerge at the top of programs – albeit with limited availability low down.

In the build-up to the last 1 January renewal, there were no signs of the hard property retro space – which had formed one prong of the so-called “U-shaped” market in recent years – easing to relieve pressure on a property reinsurance segment that was finally catching up.

The pattern of retro purchasing continued to shift away from aggregate to occurrence, while the overall volume of UNL capacity had shrunk dramatically from an estimated $20bn of global limit to what at the time was estimated to be in the range of $12bn to $14bn.

Some sources have suggested it fell even lower to as little as $11bn.

This year – in line with the more orderly property cat reinsurance market that has emerged following the turmoil at 1.1 – the retro market is widely viewed as having returned to a more stable place.

“I think retro is stable. A lot of people shed some risks and took bigger retentions and buyers had to adjust [to the reduction in capacity],” said one writer of reinsurance and retro on the sidelines at the Monte Carlo Rendez-Vous.

Sources said the expectation for 1.1 is for a significant moderation in the rate increases on retro UNL placements that will likely be similar in magnitude to those on the underlying reinsurance business.

Market commentary from brokers has also pointed to more of an equilibrium being found in retro after 1 January 2023.

On Monday at the flagship reinsurance event, Guy Carpenter’s CEO of global specialties James Boyce noted that the non-marine retro market has experienced a period of “significant rate hardening” in recent years.

“However, greater price stability was witnessed between 1 January 2023 and the mid-year renewals. The mid-year placements also saw movement on minimum rate on line levels and greater reinsurer willingness to deploy capacity at lower rates,” he commented.

The executive suggested that the focus of negotiations since 1.1 has shifted from one of capacity “to a more pragmatic and considered discussion centred on price, attachment levels and coverage”.

“Many retro providers have made clear their stance around minimum attachment levels that often exclude potential exposure to higher frequency perils and attritional losses,” he added.

His colleague Richard Morgan, head of non-marine specialties at Guy Carpenter, said the buyers looking to optimise retro strategies in 2024 will need to navigate the widest potential pool of capacity or capital providers.

“Current hard market dynamics, when expected margins look positive, create the right time for buyers to develop extensive relationships across both the traditional and alternative markets in order to create competitive tension not just for the 1 January 2024 negotiations, but through the wider market cycle,” he commented.

Easing of capacity constraints

Rival Aon also suggested that buying conditions in retro are beginning to become less challenging.

In a report released ahead of Monte Carlo the firm said that in the absence of further disruption to the retro market, some easing of current capacity constraints can be expected at upcoming renewals.

“But concerns around the impact of secondary perils will likely maintain discipline at the lower end of programs for the foreseeable future,” Aon commented.

It reported that through 2023 the property retro market has found “a new equilibrium”, with stabilised supply-demand dynamics through post-1.1 renewals.

“Subject to no major event occurring, property retro is set to play a constructive role in supporting property catastrophe renewals in 2024,” Aon continued in its pre-renewals briefing.

Commenting during a webinar briefing discussing the report last week, Andy Marcell, CEO of Risk Capital at Aon, noted that the Lloyd’s market tends to be more reliant on retro because of its capital construct, suggesting there would not be significant capital inflows to that segment.

But he suggested that occurrence limit has begun to increase again, and that there could be greater quota share availability this year.

“That doesn’t mean there’s a fundamental shift. I think what’s different this time versus last year is that those reinsurers that were essentially arbitraging the tail with retro and also in the frequency lower down with aggregate covers – a lot of that capacity in the retro market doesn’t exist today.

“However, Bermudian reinsurers, European reinsurers and US reinsurers have learned to live with that reality and the structural change in the reinsurance market – in particular the retention change. So the product they’re selling is more around severe cat than around frequency than previously,” Marcell continued.

More orderly at mid-year

In its recent renewals report, Gallagher Re said that mid-year retro renewals were more orderly compared to the dislocation seen at 1 January.

“Greater clarity on business plans and inwards rating environment, coupled with a clearer understanding of market requirements, meant buyers were more prepared for the challenges, and geared their purchases around prevailing market dynamics,” said the report.

The firm said that mid-year pricing remained broadly in line with 1 January (see table), with underwriters remaining disciplined around coverage and attachment points.

Gallagher Re also observed that UNL market capacity was less constrained than at 1.1, but that supply was concentrated to the middle and upper-end of programs.

“Sufficient capacity for buyers ‘core’ layers provided coverage and pricing hurdles were met. [There was] over-supply of capacity for tail protections, particularly for single peril region coverages, but [the] market remains under supplied for bottom-end and true frequency level covers,” it continued.

The intermediary added that quota share capacity remains constrained on a traditional basis, but the improving first tier rating environment is attracting new capital into investors’ quota share strategies.