July 12th, 2011

Focus on Hurricane Season at July 1, 2011 Reinsurance Renewal: Property Retrocession

Posted at 1:00 AM ET

The run up to July 1 is not traditionally a big renewal period for catastrophe retrocession. It is more about new and opportunistic purchases, as clients look to mitigate the effects of the coming US wind season as best they can. However, it is precisely because of this renewal date’s proximity to the wind season that deals purchased at this time tend to be an important indicator of pricing direction and activity. We have observed that activity within the sector has continued the trend towards rate rises (on both loss-affected programs, and, to a lesser extent, loss-free programs). This activity has been mainly driven by industry loss warranty (ILW) and county weighted industry loss (CWIL) purchases. It must be viewed against a background of significant tornado activity and flooding in parts of the United States and the latest earthquake in New Zealand in June.

Capacity is expanding as a result of the development of some sidecars that have been proposed to write catastrophe retrocession business. As a general rule, we have seen demand from buyers for new covers, specifically United States all perils first event and second and subsequent loss covers. There has been strong demand for all types of traditional/industry loss warranty/CWIL covers. CWIL, in particular, has seen a sharp increase in interest, with Guy Carpenter having now placed over USD1.3 billion in limits to date for 2011.

Trading activity has also been healthy in the ILW market in recent weeks. Focus, as always at this time of year, is on United States wind, both first and second event protection. Despite increased demand, pricing remained stable following price increases earlier this year. Capacity remains readily available from both hedge fund and traditional carriers who set aside limits to take advantage of the price increases we saw at the end of the first quarter. The ILW market is thus comparable with the same time last year (where rates surged in the short term to similarly healthy levels) if not up slightly.

A demand for additional levels of protection has been driven by several factors. One of these is a desire to lock in profits for year-end by spending what is left in the catastrophe budget on additional coverage, thereby assisting the maintenance of a positive result. Other factors include the much-discussed new model RMS v11, which has seen average expected losses for portfolios increase significantly in many areas of the United States. Coupled with these factors is the overwhelming desire of clients to not become ‘outliers,’ which might negatively impact their standing with the equity markets. They would rather stay within the expected range of returns for their peers in the market.

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