February 8th, 2010

Property Retrocession Renewals

Posted at 11:11 AM ET

The property retrocession market renewal customarily closes late and the 2010 season was no exception. Buyers generally prefer to wait to ensure that they have the best possible view of their own inwards portfolio exposures before proceeding to purchase. A late, speedy renewal is possible because of a number of factors including uniformity of required data; the relatively small size of the market; a quick execution period and a reduced number of buyers coming to market at this time of the year.

For those who came to the market late, there was little opportunity to explore significant change to their program structures and the process focused around which improvements could be attained in slip terms and conditions. However, those who entered the process at an earlier stage were able to explore alternative product solutions and structures they deemed to be more practical for their future needs. Despite the late start by some, the process was largely completed by 1st January.


Capacity for treaty retrocession increased modestly, an improvement on the tight situation at the 2009 renewal. A limited amount of new capacity entered the market to write treaty retrocession business and some existing participants were prepared to offer increased capacity. There was also initial uncertainty as to whether Berkshire Hathaway would re-enter this area of the market in a significant way, having reduced the number of commitments they had for 2009.

There was evidence that buyers were assessing how original reinsurance renewals were progressing before determining what their retrocession budget should be. We anticipate that there will be plentiful levels of capacity available for purchasers who, with the prospect of more opportunistic purchases, have either delayed their decision or have forthcoming renewal dates during the first quarter 2010

Catastrophe Treaty UNL Retrocession

Driven by a softening trend in the pricing of the underlying treaty reinsurance market and a benign natural catastrophe loss year, buyers sought similar recognition from their retrocession providers. While retrocessionaires were keen to resist price reductions, the limited amount of new capacity enabled clients to exert more control over this process. Ultimately, a year-on-year risk adjusted reduction of around 10 percent was achieved.



Continuing revisions to the vendor catastrophe models also helped to invigorate pricing competition, most notably in the US. Those underwriters who relied more heavily on the modeled output to support their underwriting decisions were notably more competitive, whereas those who continued to use the models as supplementary underwriting tools refused to give up rate based solely on lower predicted losses from the models.  

Catastrophe D&F

There was increased capacity available for Catastrophe Direct and Facultative (D&F) compared with levels at the 2009 renewal. This market traditionally attracts a wider panel of supporters than treaty retrocession. Generalization about market movements is difficult in this line because each buyer presents a different set of circumstances to be evaluated. For example, changes in the portfolio written, the loss history, and the structure and pricing of any program in prior years need to be taken into account in any assessment. The difficulty is exacerbated by recent changes to the models. The effect on probable maximum losses varies significantly from client to client depending on the portfolio mix. Overall the perception was of a weaker market, with risk-adjusted rate reductions in a range between -5% and -10% available.

Industry Loss Warranty

At the 2009 renewal the Industry Loss Warranty (ILW) market saw unusually early activity as buyers were seeking capacity at the same time, or even before, the purchase of their standard protections. For the 2010 renewal the market reverted to a more normal pattern with clients focusing on their ultimate net loss placements before turning their attention to ILW. There were few major purchases at January 1, 2010.

ILW prices in some areas were down by as much as 30 percent from the spike that occurred in January 2009. Satisfactory capacity and the effects of recent revisions to the catastrophe models contributed to the weakening of pricing.

There are indications that capacity would return to the market in the event of any up turn in pricing. Several prospective new providers appear to be poised to enter the market to exploit any such situation should it occur, for example post-loss.

An ILW (Industry Loss Warranty) is a risk transfer mechanism designed to protect (re)insurers from significant defined events, typically natural disasters. ILWs may be structured as a reinsurance contract or as a swap. Payouts under these index based instruments are triggered when the level of industry-wide insured losses for a particular event exceeds some pre-defined threshold. The trigger is usually on a binary basis (i.e. once the threshold is exceeded, the full limit of the ILW is available for payment). Furthermore, in those instances where the ILW contract is a reinsurance contract the buyer must bear a retention and can only recover the ILW limit to the extent of its own losses from the trigger event. However, the retention is normally small and thus there is little risk of non- collection in the event of a trigger event occurring.

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