As traditional reinsurers expand their coverage and show more willingness to support lower layers, primary carriers are benefiting from increased optionality and are facing less pressure to leverage captives for their first-layer risks, according to Adam Schwebach, Head of Property, North America, at Gallagher Re.
In an interview with Reinsurance News, Schwebach commented on how the downward expansion of capacity is reducing the need for carriers to utilise captives for their first-layer risks.
“More than anything, what it’s giving cedants is optionality,” Schwebach noted. “They can choose to utilise their captive where, historically, it may have been writing an entire first layer when the market wasn’t there, or the pricing was not attractive to cede that risk to a third party. Now, we’re seeing captives used more as a co-participation on a layer, sitting alongside traditional reinsurers. There’s a good story to tell with that for both sides because interests are aligned.”
“But equally, in plenty of cases, we’re getting to scenarios where the captive is not needed to fill out layers. A captive may have had the entirety of the first layer previously, and now it is 100% placed within the traditional market. That gives clients the ability to look at that layer and say, ‘Is it really a risk I want to keep, or is it better served in the traditional market?'”
Choice will be the biggest benefit, Schwebach stated, as some cedants will look to maintain their captive strategies to match their overall risk tolerance, while others capitalise on the opportunity to strengthen third-party reinsurer relationships or move risk entirely off their balance sheet.
The current momentum of capital deployment and softening rates is expected to persist through the second half of 2026, and the Atlantic hurricane season is unlikely to dampen reinsurers’ appetite, the executive stated.
“It’s always tough to have the crystal ball to know exactly what’s going to happen in the future. My gut tells me that I think most programs are going to have sign-downs. Most reinsurers aren’t going to be able to fully deploy, so I think they’ll be looking for opportunities to continue to deploy post-June 1,” Schwebach stated.
Currently, reinsurers are dealing with an abundance of capital that needs to be put to work. While Schwebach does not expect anyone to act “rashly or irrationally” to deploy capacity, the supply-demand dynamics will inevitably pressure pricing.
He continued: “But I think we’re going to continue to see reinsurers looking for ways to deploy excess capacity, and that’s likely going to result in rates being lower for anything post-mid-year.”
In this softening environment, cedants are redirecting their cost savings toward horizontal protections, such as third and fourth-event coverage back into their placements.
While these are not top-to-bottom cascading structures as seen in past soft cycles, they offer vital protection for top layers. These structures were not available during the recent hard market due to the high litigious environment seen in Florida and general pullback from reinsurers, Schwebach noted.
He said: “This is coverage that would have been in place in a softer market cycle in years past, but in a hard market cycle, there are only so many pennies in a dollar, so they had to make some decisions on what was a ‘nice to have’ versus a ‘need to have.’ Oftentimes these coverages either weren’t available or were too cost-prohibitive to buy.”
The resurgence of these structures has been influenced by competition from the ILS and cat bond market, the executive noted, which have also consistently shown a willingness to provide this type of coverage.
In early spring, clients in the cat bond market sought top-and-drop or aggregate coverage as part of their annual reinsurance protections, Schwebach noted.
“When that happens,” he explained, “reinsurers take note, and the brokers are doing their best to remind them that if the cat bond market is providing this coverage, it would be great if they would too. We saw an increasing willingness from traditional reinsurers to provide that cover and do so in a cost-effective manner, but oftentimes it was a collaboration between the traditional market and the ILS market in providing that type of coverage.”
