Just 225 people work on the front line of the non-marine natural catastrophe retrocession market, a corner of the insurance sector that generated $1.38bn in premiums at 1/1/2001. The cash was ceded by 75 reinsurers and 60 Lloyd's syndicates to a market of only 20 major excess of loss retrocessionnaires in exchange for cover of about $8.5bn. Collectively, the retro market had paid claims of about $2.5bn in the previous 20 months or so, of which about $1bn related to recoveries in respect of losses arising from European windstorm Lothar – half the reinsured total. In 1999, the retro market endured a loss ratio of about 250%. So said Dominic Christian, a member of the non-marine retro team at London-based broker Benfield Greig. Speaking at the broker's third biennial European Seminar in Paris in May, Mr Christian delivered an extremely comprehensive catalogue of the retrocession business, including pricing data which he admitted, even as he was revealing it, could come back to haunt him. For example, he suggested that at the beginning of this year reinsureds could buy retro cover for 100% of losses in excess of 50% of their catastrophe excess of loss premium income for 33% of subject premium income. Cover for 120% excess of 40% of a ceding reinsurer's largest loss could be bought for 17.5% of the relevant assumed reinsurance premium.

Determined stance
These rates are up – way up from the trough of 1998. The reason, Mr Christian argued, is the obvious: the small retro market is determined to recover its recent losses. In 1999, he said, there were 19 natural catastrophe losses affecting reinsurers, of which 13 led to retrocession recoveries, comprising eight hurricanes, one tornado, three earthquakes and one flood. However, reinsurers, based on rates on line (ROL) at the last year-end renewal, are accepting about half the premium they were in 1994. These are the major drivers of structural and pricing change in the retro market.

Mr Christian described the size of the market in terms of Benfield Greig's five ‘sectors' of the nat cat retro universe. Commodity business, characterised by short-term covers and little loyalty between cedant and retrocessionnaire, yielded about $70m of premium for 2001. “It was a higher figure two or three years ago, but many of the participants are no longer in the business,” Mr Christian reported. Original loss warranty business – “in essence a bet,” according to the speaker – delivered the retrocessionnaires $165m of premium income. The so-called ‘partnership market', which entails annual contracts with renewal commitments written under long-term relationships, is worth about $750m, Benfield Greig estimated. Mr Christian noted that the Benfield Greig retro team did not see a single partnership relationship break down at the 1/1/01 renewal. The multi-year, finite and semi-finite market, comprising products often referred to as ART, contributed another $200m, Mr Christian said, adding the caveat that estimating the premium and coverage for catastrophe occurrence under such deals is “almost impossible.” Finally, the cat bond market has yielded $190m for its retrocession capacity to date.

Combined premium
That combined premium of $1.38bn bought total retro cover of $8.47bn, Benfield Greig estimated. More than ten reinsurers are buying capacity of $250m or more, but most – about 75 – buy between $25m and $100m. “Demand, we suspect, is at an all-time high,” Mr Christian said. “Buyers are displaying marked reluctance to increase retentions, tending to put their capital-at-risk at the upper end of their exposure profile, with return periods beyond one to 100.” He said the supply side of the equation is “highly informed,” with few new players, but the incumbents are ready and able to deploy new capital for retrocession as demand swells. Elasticity is minimal. Mr Christian reported that often the market made available sufficient capacity to get a contract home at an ROL of 10%, even though no capacity at all was available at 9.5%. Rate increases have been widespread. ROL increases of 25% have been average for (rare) claims-free contracts without material changes in exposure, the broker said, adding: “Loss-driven contracts have experienced increases of 100% to 400%.” He said the result of all these factors has been that “buyers are purchasing similar or greater amounts of cover at prices substantially in excess of 1999 and 2000.”

Mr Christian's presentation was followed by brief comments from panel members, including Peter Grove, longstanding retrocession underwriter at Lloyd's syndicate 566, managed by Limit, part of the QBE group of companies. He observed that the number of people accepting retro has shrunk dramatically, sparking a debate about the longevity of retrocessionnaires in general. “In 1991, there were 235 reinsurers writing retrocession business, but in 1985 there were 400 markets. We are down to ten today, and I believe they are here for the long term,” Mr Grove said. “They have not just popped up.”

Jean-Pierre Benoit, president of Axa Corporate Solutions, said he had no more retro capacity to deploy. “We underwrite 30% of the conventional market, and 20% of the rest,” he declared, suggesting service was lacking among the retrocessionnaires. However, he insisted Axa will stay in the game. “We are here for a long time – at the right price.”

Efficient market
Dave Eklund, chief underwriting officer at Renaissance Re, described the retro market as “extremely inefficient... You get a wide spread between the winners and losers, perhaps wider than any other market. Look at Australia,” he quipped, noting that retrocessionnaires cannot make sufficient returns. “I doubt that there will be any year written at enough of an expected profit to justify the risk,” he said. He observed that in 1998 and 1999 many players chose to pull out after 250% loss ratios were exceeded, even without a big US or Japanese loss. Nevertheless, he agreed that the some of the remaining retrocessionnaires are committed to the business and are apt to stick to it. “There is a very solid retro market out there, and a piece of it will be there for a long term.”

The final speaker, Chris O'Kane, chief underwriting officer at Lloyd's insurer Wellington plc, said his operation has spent “about $1.2bn on reinsurance since 1993, returning a profit of 24% on income.” He alone chose to question the staying power of the retrocessionnaires. The 2001 renewal “was the most difficult in the last six or seven years,” he said.

“Wellington was faced with $75m or $80m of retro capacity that wasn't available, because people were out of the business.” He said four out of ten retrocessionnaires have “exhibited major changes in their underwriting in the last years. I infer they could make major changes in other areas, and may do something radically different in the future... Partnerships can offer stability, but I look at that as retro plus.” His conclusion: “I think the top ten will change.”