Using collateralized retrocession limits has increased amongst the most important reinsurance corporations as alternative capital continues to be a critical source of retro protection, but for some retro buyers the associated fee of coverage stays too high, S&P Global Rankings has said.
In reality, across reinsurance corporations analysed by S&P, their January 1st 2024 in-force books suggests a decreased use of retrocession, with higher costs the necessary driver.
The rating agency explained, “Data from Jan. 1, 2024, in force book suggests that reinsurers are barely scaling back their use of retrocession for tail risk, driven by increasing cost.
“Constraints on retrocession capability, including use of third-party capital, and persistently tightening pricing conditions are susceptible to keep prices high throughout the retrocession market.
“If the high cost of retrocession persists, reinsurers could possibly be forced to retain a greater share of risk.”
But, reinsurers still rely on retrocession, S&P noted, saying retro stays “a critical component of their risk management strategies.”
The approach taken to retrocession varies widely across the cohort of 19 reinsurance corporations S&P analysed.
“But as of Jan. 1, 2024, the 19 reinsurers inside our sample group ceded roughly half of their one-in-250-year exposure, on a straightforward average basis,” the explained.
Nonetheless, the foremost global reinsurers have tended to retrocede less of their risk than their peers do, as you might expect given the depths of their balance-sheets (Group 1 throughout the chart below being the most important corporations).
The chart above shows that almost all reinsurance corporations in S&P’s evaluation reduced their use of retrocession for 2024, over the prior yr, ceding a relatively lower percentage of their net 1-in-250.
While the smaller reinsurers, towards the upper-right of the quadrant, have sustained a significant use of retrocession to support their businesses.
The usage of different capital remained significant though and perhaps reflecting the actual fact retro capability was generally more abundant from capital market and ILS fund sources through the renewals of late, some reinsurers use of collateralized retro increased for 2024.
S&P said, “We observe that alternative capital continues to be a critical source of capability and has further increased its importance, particularly for large global reinsurers’ retro strategies.”
The chart above shows that collateralized retrocession protection use grew quite significantly for the huge global reinsurance corporations in 2024.
An element of this will likely occasionally have come from the increased activity throughout the catastrophe bond market, along with the expansion of varied reinsurance sidecar structures for this yr.
Midsize reinsurers decreased the amount of collateralized retro protection it seems, while other groups increased it only barely.
The dynamic displayed on this chart reflects the growing and maturing partnership with alternative capital on the world’s largest reinsurance corporations, as they increasingly find ways to integrate it into their businesses, each for canopy and as a source of elasticity for his or her very own balance-sheets.
While price is also putting some reinsurers off using more retrocession, so as that they’re buying less, because the selection capital partnership continues to mature they too should find ways to integrate alternative capital into their reinsurance businesses in such a way that it’s additive (driving growth, making own capital go further, delivering fee income), somewhat than a pure cost.
third-party capital purely as a source of retro protection now is relatively unsophisticated. In its place its a capital source that has a price, but that cost will probably be offset through efficient and aligned use of it.
It still does its job of protecting peak exposures, but on the equivalent time it’s a capital source which will fuel growth, moderate results, and deliver income on the equivalent time.
Since the reinsurance industry becomes increasingly adept at managing third-party capital, we expect using pure retro protection and aligned third-party capital strategies will increasingly blur, which is good for the reinsurers, the investors backing them, and the insurers receiving their protection.
Also read: The selection capital partnership matures. But what in regards to the reinsurance cycle?