Reinsurers have ceded increased levels of premium into the retrocession market in recent years by leveraging strong market competition brought by new capital inflows. However, the environment in the retrocession market was challenged at January 1, 2020, characterized by trapped capital, a lack of new capital and continued redemptions from third-party providers. Just as increasing capital levels and retrocessional reinsurance purchasing contributed to attractive pricing and products in previous years, constrained capacity and robust demand set the scene for a complicated renewal this year, particularly for collateralized quota share and sidecar vehicles.
- The quantum of 2019 catastrophe losses, coinciding with continued loss deterioration for certain 2017 and 2018 events (Hurricanes Irma and Michael and Typhoon Jebi especially), eroded or trapped capital for a third year in a row.
- Frequency covers once again bore the brunt of losses last year, prompting some investors to review their allocations to the sector.
- Capacity dedicated to earnings protection (for example, pillared and aggregate transactions) was particularly scarce at January 1, 2020.
- Increased participations from traditional carriers partially offset trapped third-party capital, but only within certain price parameters.
- The impact of climate change was an important factor during negotiations, as the frequency and severity of natural catastrophe events is putting considerable focus on pricing adequacy.
All these shifting market dynamics prompted retrocession buyers to weigh the alternatives of accepting enhanced volatility potential or considering alternative vehicles, such as catastrophe bonds. These concomitant factors culminated in significant retrocession rate increases across several types of coverage at January 1, 2020, albeit with marked distinctions depending on products, structures, relationships, risk tolerances, loss experiences and performance.