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Retro market rising to meet new demand

The catastrophe retrocession market has grown by nearly 20 percent over the past two years and will deploy a record $9bn of indemnity limit over the course of 2012, according to predictions from Aon Benfield.

Daniel Burrows, deputy CEO of Aon Benfield's Global ReSpecialty division, and Richard Wheeler, non-marine retrocession broker, also believe that the market has scope to grow further in 2013 after proving its resilience in coping with the extensive cat losses of 2011.

Cat retrocession is just one of the products traded in the growing and increasingly crowded convergence sector. However, it remains a critical area where reinsurance underwriters engage directly with capital providers, as non-traditional collateralised capital makes up almost half the current market supply (see graph right).

The notional proportion of traditional rated reinsurance companies and non-traditional capital sources has remained fairly static over the last two years - in 2010, the latter provided 45 percent of capacity compared to 48 percent today.

Dedicated insurance-linked securities funds provide nearly one third of retro supply, with traditional reinsurers controlling another 11 percent market share on behalf of third-party capital.

The growth in market volume has principally been driven by an increase in demand being met by an equal increase in supply. This material change in demand was the result of a very challenging year in 2011, with multiple catastrophe events, changes in modelled exposures and wider fiscal concerns for reinsurance companies.

There has also been a shift in the way reinsurers control and view their catastrophe exposure. The 2011 catastrophe events highlighted the vulnerability of a broad diversification strategy, where for many reinsurers the severity of losses in previously underappreciated territories and perils exposed inadequate risk pricing relative to exposures and coverage.

However, ultimately the 2011 catastrophe events proved to be less a stress test on the reinsurance balance sheet than a driver for management to regulate earnings stability from volatile catastrophe business.

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