Retro wildcards & ripple effects expected at 1/1 renewals after Ian: Moody’s

There are likely to be some retrocession market wildcards in the wake of hurricane Ian at the next major set of reinsurance renewals on January 1st 2023, according to Moody’s Investors Service.

While reinsurance companies and the insurance-linked securities (ILS) market both facing heavy losses after hurricane Ian, the issues of retrocession availability and its price could be significant drivers for broader reinsurance market pricing at the 1/1 renewals, the rating agency believes.

Reinsurers have been increasing their retrocessional coverage for business in Florida, Moody’s notes, which means this could mitigate the impacts of hurricane Ian to a degree.

But with a significant proportion of retro capacity provided by ILS funds and alternative capital providers, there can still be ramifications for the market, from a viewpoint of constrained capital availability.

At the severity of loss with hurricane Ian, the reinsurance market is set to take a relatively large share of losses on from primary insurers, with the vast majority of carriers exposed likely to tap some form of reinsurance arrangement for support.

As our readers know, some of those losses will be shared with alternative capital providers and ILS funds, through collateralised reinsurance, catastrophe bonds, sidecar vehicles and quota shares.

But of course, most reinsurers use alternative capital themselves, while some have increased their cessions to retro providers, again often alternative capital based.

In addition, ceding gross exposure through quota shares and sidecars can often result in losses ending up with alternative capital investors, as well.

Because of all of this, Moody’s expects property catastrophe reinsurance rates will rise significantly at the Janaury 2023 renewals, with retro a key driver.

“The key wildcards at upcoming renewal periods will be the availability of retrocessional capacity, which is increasingly supplied by alternative capital vehicles, as well as the related pricing,” Moody’s explained.

With the alternative capital and ILS market also expected to take “substantial losses from Hurricane Ian” and remember these will come from reinsurance as well as retrocessional capital provision, it is likely going to constrain alternative capital supply to a degree, due to losses and trapped capital.

“The reduction of available retrocessional capacity will result in higher retro pricing and is likely to have a ripple effect that also drives property catastrophe reinsurance rates even higher,” Moody’s explained.

It’s really too early still for any accurate estimates of trapped capital due to hurricane Ian at this stage, but suggestions are it could be significant, especially in collateralized retrocessional ILS arrangements.

As ever though, there are ILS strategies where trapping is mitigated, through structural and fronting arrangements and those managers that have worked to reduce trapping risk may find themselves better positioned to deliver cedent continuity and to take advantage of opportunities at the renewals.

All of which suggests the need for more rate is well-understood, but so too is the need for more capital to continue supplying the property catastrophe risk capacity the market requires.

It’s all about to become a lot more expensive, it seems, but at the same time brokers are suggesting facilities can narrow some catastrophe capacity gaps, as they seek to ensure client demand can be satisfied and that could result in an interesting rate dynamic at 1/1.