July 17th, 2012

Property Retrocession at the July 1, 2012 Reinsurance Renewal

Posted at 1:00 AM ET

The run up to July 1 remains a relatively quiet renewal period for catastrophe retrocession in terms of volume of business transacted. The focus is more about new and opportunistic purchases, as clients look to finesse and optimize their purchasing in order 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.

Activity within the sector continued the trend towards rate rises seen throughout 2012, particularly on loss-affected programs. However, the magnitude of these rate rises year on year was lower than those seen in the First Quarter 2012 renewals due to the rate increases applied in the Second Quarter of 2011.

The relatively benign start to 2012 also had an impact on limiting the scale of rate increases. Capacity outstripped demand for peak peril covers, but this did not lead to any softening of rates. Rather, reinsurers were happy to hold this capacity and only deploy it at a price which they found attractive. This led to a “‘feast or famine” situation where deals either had more than adequate capacity or struggled, depending on the price “tipping point.” While many retrocessionaires were satisfied with the amount of limit deployed, there were a number of sellers with capacity available for the remainder of 2012, again with the caveat that this capacity would only be utilized if the price met certain criteria.

Generally, buyers of retrocession were able to secure the cover they required for the year, particularly as the trend continued towards supplementing traditional cover with CWIL® and other alternative retrocession solutions and products. Trading activity was limited in the industry loss warranty (ILW) market in the later weeks of the renewal.

This year many buyers brought their purchasing of cover for US windstorm forward from July, which led to a dip in demand in the later weeks. Capacity remained readily available from both hedge fund and traditional carriers, so while there was still some purchasing, the volume of trades fell in the later weeks compared to the same period in 2011. This resulted in prices stabilizing and even falling for some more regionalized covers.

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