Retro more orderly at mid-year, but rate increases of +60% seen: Gallagher Re

The retrocession market was more orderly at 2023’s mid-year renewal season, with capacity less constrained and as a result more buyers being satisfied, but still catastrophe retro reinsurance rates have risen by 30% to 60% and higher in some cases, broker Gallagher Re explained.

While things are more orderly in the retrocessional reinsurance space, the costs of retro coverage remain high and as a result some buyers are not yet finding buying much retro all that attractive.

Gone are the days of cheap and abundant retro capacity, when business models often hinged on having this protection in place and participants in some market’s, such as Lloyd’s, relied on the retro products that were available.

Retrocession does seem to have been more accessible at the mid-year renewals, than it was at 1/1, but still challenges remain and many reinsurers are using significantly less retro than they had a few years ago.

Commenting on the retrocession renewals, Tom Wakefield, Global CEO of reinsurance broker Gallagher Re said that, “Another sign of an improvement in the supply of capacity was seen in the retrocession market, where capacity on an occurrence basis was available—albeit at a significant cost, which in many cases was not yet proving attractive to buyers.”

But overall, the broker believes that mid-year retro renewals were more orderly, than the dislocation seen at January 1st.

Gallagher Re explained, “Greater clarity on business plans and inwards rating environment, coupled with a clearer understanding of market requirements meant buyers were more prepared for the challenges, and geared their purchases around prevailing market dynamics.”

Adding that, “Renewals generally quoted in a timely manner, with negotiations concluded in advance of inception dates.”

However, retro pricing remained roughly in line with January 1st, while underwriters were seen to be particularly disciplined on coverage and attachment points.

Gallagher Re reported in its recent reinsurance renewals report that non-marine retrocession rates increased by +30% to +50% for catastrophe loss free renewals and by +50% to +60% for catastrophe loss hit retro programs.

Importantly though and a signal of the capacity situation having improved somewhat, Gallagher Re said that UNL retro market capacity was less constrained than at the January renewals.

However, the broker said that, “supply is concentrated to the middle and upper-end of programs,” showing that appetite for lower-layer retro remains more limited.

Assisting with the capacity situation, trapped collateral linked to hurricane Ian as a function of Buffer Loss tables has reduced, Gallagher Re continued to explain, saying that this is as client loss numbers have reduced in some cases.

On where appetite is now being seen to write retro, Gallagher Re said that there was, “Sufficient capacity for buyers ‘core’ layers provided coverage and pricing hurdles were met,” while also noting an, “Over-supply of capacity for tail protections, particularly for single peril region coverages.”

But, the market remains “under supplied for bottom-end and true frequency level covers,” according to the broker.

There have been some new inflows, according to Gallagher Re, as the, “Strong performance of catastrophe funds during 2023, coupled with a significant pipeline of maturities has led to new inflows.”

Which might be seen as more encouraging for the rest of the year and any additional retro buying that might occur after the mid-year renewals, when some reinsurance firms might look to hedge their underwritten exposures.

Gallagher Re also noted that there has been a strong appetite for some industry-index products, as we reported yesterday related to the catastrophe bond market.

Gallagher Re said, “Oversupply of capacity for tail-end Indexed protections has reduced pricing and increased market appetite for lower attachment points relative to 1st January.”

Another note of encouragement is given on quota shares, so potentially suggesting some relief for the reinsurance sidecar market as well.

“Quota Share capacity remains constrained on a traditional basis, but the improving 1st tier rating environment is attracting new capital into investors QS strategies,” Gallagher Re points out.

Read all of our reinsurance renewals news and analysis.