Non-marine retrocession capacity was “materially constrained” at the January 1st, 2023, reinsurance renewals, with widespread pressures on attachment levels as sellers’ concerns around inflation and frequency of losses contributed to a challenging environment, according to Gallagher Re.
The retro market has been constrained for some time, and reinsurance broker Gallagher Re’s 1st View renewals report highlights a continuation of this trend at Jan 1st, 2023, a key renewals season for re/insurers.
According to the broker, this year, more significant reductions were seen on U.S. exposed programmes. In part, this was driven by the very challenging fund raising environment for the insurance-linked securities (ILS) sector in light of the recent cat performance, combined with broader macro-economic influences, which has driven some capital market investors to search for more liquid investments.
At the same time, numerous traditional reinsurance companies looked to leverage their available U.S. cat aggregate on 1st tier property reinsurance over retro, which Gallagher Re attributes to the supply / demand imbalance within this market.
“Widespread pressures on attachment levels driven by inflationary concerns and frequency of losses” was also witnessed at 1/1, says the broker.
Notably, some buyers of retro exhibited a higher risk tolerance when compared with the previous year as underlying conditions improved on assumed business. This was especially evident for international exposures, where Gallagher Re says that rate improvements and coverage restrictions were more meaningful than first anticipated.
But while capacity was materially constrained in the retro space, the broker notes that meaningful pockets of capacity remained available for buyers looking to address very specific requirements.
“Buyers who recognised market conditions, engaged early and communicated a clear purchasing strategy benefited from a more orderly renewal,” says Gallagher Re.
Another trend highlighted by the firm at 1/1 is the fact reinsurers are increasingly eager to provide coverage on a named natural peril basis, with accelerating pressure to shift towards modelled perils only on aggregate protections.
In terms of demand, Gallagher Re says that the majority of demand for new limit at 1/1 was identified for tail capacity. However, the broker adds that “pricing was often very penal with larger percentage rate increases being seen at more remote attachments.”
On the supply side, aggregate capacity remains “in very short supply” with few remaining sellers looking to manage attritional loss by way of peril restrictions. Available limit was typically sold on a 2nd/3rd event basis, says the broker.
Quota share capacity also continues to reduce, says Gallagher Re, as limited new capacity entered the space and incumbent reinsurers looked to further cut their participations.
At 1/1, non-marine retro, risk loss-free programmes saw rate increases of 10% to 20%, with 25% to 35% increases seen for risk loss-hit programmes. For cat loss-free programmes, rates jumped by 30% to 50% at 1/1, with the steepest increases seen with cat loss-hit treaties, which saw rate rises of 50% to 60% at the most recent renewals, reports the global broker.