Additional ILS capacity helped moderate retrocession prices at 1/1 renewal

Inflows of capital to certain insurance-linked securities (ILS) managers and structures has helped in moderating retrocession pricing at the January 2024 renewals, resulting in a much less stressed market and better outcomes for some retro buyers.

However, this picture is not the same across the retro marketplace, with lower attaching retrocession still a particularly challenged segment and aggregate coverage still in short supply.

While capital has flowed into retrocession, it has not done so at any cost.

ILS fund managers that have raised new retrocession focused capacity have been particularly focused on maintaining attachment points at higher levels and ensuring pricing remains far higher than it was just two years ago.

Names being mentioned as deploying additional capital to retrocession opportunities at the recent renewals include some of the usual firms, such as Aeolus Capital Management, D.E. Shaw, Vantage Risk via its AdVantage structure, Pillar Capital Management, RenaissanceRe, and Securis Investment Partners.

That said, at the higher attaching layers of retrocession towers, there has been some price moderation, with some of the brokers’ reinsurance renewal reports citing price declines.

James Boyce, CEO of Global Specialties at broker Guy Carpenter, said that, “At January 1, more than sufficient supply to meet demand for property retrocession renewals led to improved buying conditions, particularly at more remote levels. Retention levels broadly held despite growth in underlying portfolios, and greater consistency in terms and conditions was achieved.”

While Gallagher Re noted “ample retrocession capacity” was available and the firm’s CEO Tom Wakefield said, “Existing suppliers of retrocession capacity responded by being more flexible at 1.1.24 with additional capacity coming from ILS investors.”

As a result of this, Wakefield of Gallagher Re also noted that, “Risk-adjusted pricing changes of up to -15% were achieved,” in certain areas of retrocession.

Capacity has proved to be highest for peak peril ultimate net loss retrocession, with ILS fund inflows one of the drivers of better buying conditions, it seems.

In fact, Gallagher Re cites an “oversupply” of ILS capacity for some retrocession renewals, especially if buyers were willing to purchase one-shot coverages.

While loss free catastrophe retro renewals saw some price declines, of up to -15% by Gallagher Re’s measure, for many buyers it was more of a risk-adjusted flat renewal, as their increased exposure was met with comparable price rises, driving a flat outcome on a risk-adjusted basis.

Howden said that retro was flat on average, but also said that “increased capital inflows towards the end of the year yielded stable retrocession renewals at 1 January 2024.”

Improved performance of retro portfolios and fund strategies has helped to put some pressure on price and signings, Howden explained.

We understand this to have been the case for many of the largest retro programs, where the global reinsurer cedents have grown their property catastrophe reinsurance books considerably over the last year.

So, it’s clear that retro markets are not willing to take on more risk without being compensated and while there have been some declines in retro pricing, largely at the tail-end, this certainly wasn’t a market-wide outcome it appears.

Howden also noted that “low-attaching occurrence layers and aggregate covers continued to suffer from a lack of supply,” as these areas of the retrocession tower remain more challenging for buyers.

Importantly though, there has been enough improvement in retrocession market dynamics to enable reinsurers to display a commensurately increased appetite themselves and the cascading effect of a smoother renewals worked its way from retro into primary reinsurance as well. Retro once again proves supportive of reinsurer appetites, but only at the layers where capital wants to expose itself, so it still seems to largely be a sellers market.

Read all of our reinsurance renewals coverage here.