Rebalancing the market

This is an extract from Guy Carpenter's September 2019 retro market update. Clients can request the full report here.

Retro buyers will need to plan ahead and be flexible to navigate the pressure in parts of the retro market in 2020

Whatever the weather in the final months of the year, it is unlikely that it will be business as usual in the retrocession market this January. While new capital continues to flow into the sector in innovative ways, some markets and some structures are likely to be under increasing pressure. For 2020, Guy Carpenter is advising its clients be open-minded to restructuring their retrocession programmes with a different mix of products.

A number of new players have entered the market over the last 24 months. These platforms have come in diverse shapes and sizes. Some are entrepreneurial startups; others are strategic initiatives of reinsurers or asset managers; and others have been a consequence of M&A.

In the same period, the performance of both the rated and unrated incumbent markets has been extremely varied. Many retrocessionairs have performed as advertised, but for others losses have eroded both existing capital and the ability to raise new funds. Communication with stakeholders before, during and after losses has also had a big impact on investor confidence in certain platforms. Some firms have already exited the retro market whilst the future of others is now finely balanced and sensitive to both further losses and changes in the global macroeconomic environment.

Retrocession Markets

Incumbents

In the last twelve months, the total AUM of reinsurance funds shrank for the first time in more than twenty years. But while some funds went into run-off, others have continued to grow. The large dispersion in the direction and magnitude of growth of individual managers is closely related to their performance in 2017 and 2018. The variance in track record in these years of significant losses is much higher than in benign years and some of the strategies focused on retrocession have been amongst the hardest hit.

Despite the lack of activity, the first half of 2019 has also proved to be a challenging period for many funds. Two drivers of this have been loss creep (from Irma and Jebi in particular) and mark-to-market losses on cat bond portfolios due to rising yields. It will only take a modest level of losses in the final months of 2019 to push a number of funds into a third year of negative returns. This could lead to some challenging conversations with investors.

The performance of rated markets has been similarly varied. In addition to the suffering the same problems with loss creep from cat losses, some firms have picked up large risk losses from events including the Capital One data breach and the Philadelphia Energy refinery explosion.

New entrants

The last two years have seen a significant number of new reinsurance and retrocession markets – and there continues to be a strong pipeline of credible teams with ambitious business plans. Some have already gained significant momentum whilst others have already stumbled. Incumbents have also doubled down their efforts to buy or build third-party management platforms and the largest ILS fund is now part of a US insurance group.

Retrocession Products

A number of the largest retro markets are very specialised in particular products. This means that the uneven performance and outlook of markets has translated to uneven pressures on retro products. Lack of supply of some products is leading to increased demand for others.

Two issues that have affected every type of cover are reserve deterioration and the surprise contribution of the California Wildfire losses in both 2017 and 2018. The quality of reserving and modelling practices are likely to dominate some renewal discussions.

Posted: Monday, September 23rd, 2019