The retrocession rut hinders P&C insurers

The capacity shortage in retrocessional property catastrophe reinsurance protection has “materially disrupted” the property and catastrophe insurance industry, according to an article recently published by Standard & Poor’s Ratings Services.
The article “Responding To The Retrocessional Squeeze” reports that the estimated US$80 billion-$90 billion in losses resulting from the 2005 hurricane season has thrown the market out of balance.” The disruption is particularly evident the further one gets from the original risk, so there has been a material reduction in retrocessional capacity offered by the reinsurance industry,” the article says.
Standard & Poor’s credit analyst Steven Ader says the reinsurance industry’s capacity has been hampered by the absence of retrocessional protection, which has ultimately led to an inability for many reinsurer’s to underwrite primary insurance companies. “This, in turn, has significantly hampered the underwriting capacity of the primary insurer,” Ader says.
S& P’s says it is aware of a number of instances where primary insurance companies have suspended the underwriting of catastrophe-exposed risks because of the unavailability of reinsurance.
The 2005 hurricane season highlighted the disruption retrocession inflicts to the reinsurer’s core goal of measuring and diversifying risk exposures to the maximum extent possible, S&P’s says. In explanation, S&P’s says that when a reinsurer purchases retrocession protection for its portfolio, the assuming reinsurer is so far removed from the underlying exposures that it becomes much more difficult to specifically identify where the exposures are. This problem is further compounded by the significant correlation of retrocessional reinsurance to severe catastrophic events, according to the article.