Retro pricing should remain firm in 2005 but only in the absence of any major losses, says Piers Cantlay

At 1 January 2005, the property retrocession market was still digesting the 2004 windstorm activity in the US, Caribbean and Japan. In terms of size, these losses were small to medium by property industry standards (all under $12bn) and therefore generally contained within the net retention of most retro purchasers. They did, however, serve to remind retro underwriters that the relative calm of 2002 and 2003 was not necessarily a given. Following low catastrophe loss years prior to the 2004 storms it looked as though retro pricing would be coming under some pressure, so the impact of these losses resulted in continuing firm pricing in this market. This translated through to the mid-year 2005 retro renewals. Certain markets would price competitively on non-worldwide contracts or contracts that did not include US windstorm exposures. But with an above average US hurricane season expected again, markets are understandably nervous about taking on risk that cannot be ceded into their own retro programmes.

Retro pricing is unlikely to move significantly during the remainder of the year or at the 2006 renewal unless a major loss occurs. Conditions are likely to remain similar, with the one uncertainty being provision of terrorism coverage. Momentum to renew the Terrorism Risk & Insurance Act (TRIA) has been increasing recently due to its planned expiration at 31 December 2005. The decision on renewal is yet to be made.

Pricing in the direct reinsurance market was mixed. At the traditional 1 June and 1 July renewal dates, the 2004 loss activity ensured that pricing in Florida and - to a lesser degree, the US as a whole - increased, although perhaps not by as much as expected. But pricing for Continental European exposures remained under pressure along with many of the "non-peak" territories.

The exception was the Caribbean, which saw double-digit increases in the most loss affected islands.

In terms of new entrants to the retro arena there are one or two markets that have recently "skirted around" writing retro and for 2005 have become more established players. In addition, there are a number of hedge funds that have joined their more established colleagues and recently started writing industry loss warranties and some traditional retro business.

However there has not been the huge influx some were expecting.

Non-traditional products remain in existence but, with the current environment of SEC subpoenas, there is reluctance on the part of both buyers and sellers to enter into many new "non standard" contracts. Underwriters of finite retrocession have attempted to address accounting issues through the restructuring of treaties to include more risk transfer, although the decline in popularity of these structures is expected to continue. Most participants in this market have decided to reduce income from such contracts until the underwriting environment has settled and the boundaries of acceptability have become clearer.

The capital markets are likely to maintain their role in providing remote loss cover with effective pricing and security. Their involvement, notwithstanding the provision of capital to the hedge funds, is primarily in the form of catastrophe bonds. The popularity of these structures is still slowly increasing and as ever, the number of transactions is small but the quantum large - issue sizes tend to be in excess of $100m. Industry loss warranty covers still remain popular as a means of obtaining cover where such is not readily available on a traditional platform.

As renewal season approaches the retro arena will be watching keenly to see how the US windstorm season climaxes. Having seen hurricanes Dennis and Emily arrive early in the season, albeit causing relatively little insured damage in the US, the scene remains set for busy, uncertain times.

Providing no major catastrophe events occur before the end of 2005, the 1 January 2006 renewal season should see retrocession purchasers looking to add a little more value to their buying. In the event of another year of loss activity, a more prominent re-thinking of retro strategy from all parties may be the outcome.

- Piers Cantlay is chief executive officer, ReSpecialty Property at Aon.


On 30 June, the US Treasury Department's study into the effectiveness of the Terrorism Risk Insurance program concluded that while TRIA had succeeded in stabilising the private insurance market, the act in its current form should not be extended beyond 31 December 2005 as it could be detrimental to market innovation and capacity growth.

However, in his address to the House Committee on Financial Services in July, Ernie Csiszar, Property Casualty Insurers Association of America president and CEO, said, "Without federal participation, terrorism is an unpredictable and uninsurable risk that threatens the solvency of the insurance industry and the stability of the nation's economy. And while there is no 'perfect' solution to this complex problem, this does not mean that insurers and the federal government can't create an effective public/private partnership that protects our economy and our citizens from the financial devastation of a terrorist attack."