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Available retrocession cover will come down but not 'crunch,' execs say

Capacity for retrocession insurers has tightened but will probably not squeeze the market because higher prices would likely attract more players, insurance executives said.

The effect of payouts from record storms and wildfires in recent years has lessened the availability of retrocessional cover, which reinsurers buy to help cover losses they are obliged to pay to primary carriers, executives said during a panel discussion during the American Property Casualty Insurance Association annual meeting.

Some of the alternative capital in the market has been withdrawn, including by investors in insurance-linked securities, said Steve Levy, president and CEO of Munich Reinsurance America Inc. reinsurance division. ILS investors have had their capital trapped in the ongoing settlement of claims from catastrophes, Levy said.

Tightened retrocession capacity will likely lead to a reduction in the coverage the reinsurance sector can provide to primary insurers, Levy said

"I would view that as a trend and a factor that leads ... to higher rates going forward in the retro market and knock-on effects in the [P&C] market," Levy said.

However, any reduction of available coverage will likely be a marginal development, rather than a major shortfall, said David Priebe, chairman of Guy Carpenter. Losses from Typhoon Hagibis will strain the market, but U.S. risk will not see a capacity crunch, Priebe said.

"There will be capacity challenges, particularly in deep South areas ... and for the wildfire risk," Priebe said.

And Mike Mulray, chief underwriting officer for Everest Insurance, said any tightening that leads to higher premium rates would entice currently sidelined capacity back onto the playing field.

"I think as you see pricing firm up a little bit, you'll see more of that capacity put to use," Mulray said.

Accompanying the pullback in ILS cover has been some risk reassessment on the part of investors, said David Marra, chief underwriting officer for RenaissanceRe Holdings Ltd. After the loss years of 2017 and 2018, investment funds that have been deploying capital into ILS are mulling its merits and the risks it poses to their investors, Marra said.

"The funds that invest in these vehicles are thinking twice about how much capital they want to have at risk," Mulray said. Investment capital could shift toward quality management with a track record of managing risk with ILS, Marra said.