Aon: Retro market to pivot towards increased named peril cover

Retro markets will be seeking greater clarity as to what is included in covers renewing at 1.1 with a pivot towards increased named peril cover, according to Aon Reinsurance Solutions CEO Andy Marcell.

Marcell said this shift towards clarity will likely be more important to retro providers than the percentage increase in rates achieved at the upcoming renewal.

“Reinsurers as clients are in a difficult situation, as they know they will have a certain amount of pandemic loss,” Marcell said.

“They have bought retrocession cover from collateralized markets but they don’t want to release and redeploy that cover as they can’t with precision estimate the ultimate impact to them and how much of that will be covered by their retrocessionaires,” he said.

“When people are buying retro cover in the future, the rated paper will have a natural advantage over non-rated paper,” he said.

Marcell said the impact of the changing retro market will be particularly significant for more regional reinsurers, as well as Lloyd’s market participants who rely on the retro market to meet regulatory needs.

“Some areas of the retro market are under significant pressure, such as the cat excess of loss marketplace and aggregate covers.

“For aggregate covers there are less providers. For cat XOL, some elements of the market are collateralized with capital trapped from recent loss events”.

Paul Schultz, CEO of Aon Securities, said the market could see a “switch and buy” strategy with other products bought under the ILS banner will be taken up more frequently.

“If you have the uncertainty we have in the market today, it is difficult to release that capital back and write against it again, so will need to be complementary solutions introduced to meet the needs of retro buyers,” he said.

Schultz said he expected growth momentum to continue across the broader ILS market, with a relatively active issuance period to continue into 2021.

“We expect more issuance to come out of the public sector to address protection gap issues, with more corporate clients accessing the cat bond market directly.

“And we are still bullish we will see cyber coming into capital markets, for covers such as breach, distributor denial of service and ransomware.”