Severe losses creating retro market dislocations: AM Best

The retrocession (retro) segment has been particularly badly affected by severe losses from catastrophe events in recent years, and the resulting trapped capital, according to a new report by AM Best.

AM Best’s report, titled The ILS Retro Market, COVID-19 and Pre-Emptive Trapping, said the fallout of recent and heavy insured loss years, and the uncertainty about loss exposure from recent catastrophe events, has led to investors holding back capital. This has created dislocation in the retro market, it said, with capacity tightening and rates spiking.

This trend, which results from events like Hurricane Irma in 2017, Typhoon Jebi in 2018 and California wildfires, has contributed to rate increases of up to 30 percent for July renewals, according to AM Best’s discussions with insurance linked securities (ILS) market participants.

The retro market is estimated at $20 billion, according to AM Best, with the ILS market supplying approximately 75-80 percent of the capacity for this segment.

COVID-19 has added even more uncertainty to the retro capacity conversation for 2021 renewals, AM Best warned. “The combination of uncertainty regarding business interruption recoveries, along with the so-called pre-emptive trapping of capital based on the notion that a catastrophic event, in this instance the pandemic, is ongoing, will likely create additional strain on the supply of ILS capital and retro capacity,” it said.

AM Best argued that traditional reinsurers with multiple outlets for deploying capital will be the beneficiaries of these market dislocations, as will experienced ILS funds with the experience to navigate through the current challenging circumstances.