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Retro markets turn on Thai loss expectation

The developing Thai flood loss has proved "the straw that broke the camel's back" for the retro market, signalling a hardening environment and a 1 January renewal that will match the reinsurance market for its difficulty and lateness.

This was the view of a leading retro broker, a sentiment that has echoed around the market as buyers and sellers point to increased retentions and significantly higher prices for the standard ultimate net loss (UNL) product.

According to sources, with Thailand adding to a litany of US international losses for retro writers in 2011, the availability of worldwide cover including the US has all but dried up.

"That's the indicator of a harder market - everyone wants to regionalise their exposures," a collateralised retro writer told The Insurance Insider. They added that more non-US regions are better priced than they were a year ago, making it more attractive to write them selectively.

And, while worldwide cover excluding the US is available for buyers, it comes at a significantly increased cost, with rates-on-line as high as 30 percent in some cases.

"Some people had pretty good deals internationally that have really blown up this year, so there's going to be a real reset on what cedants are going to have to take net and the price they're going to have to pay," a leading Bermudian reinsurer suggested. Buyers looking for retro cover on unmodelled risks are also expected to face difficulty in finding affordable protection.

"Worldwide cover is always an interesting issue because it doesn't fit the more specific capabilities of a lot of sellers," a senior Bermudian retro broker told this publication.

"Unmodelled risk is a question of how good you are at negotiating. It's partly down to what you are able to show in terms of the data and guidance on exposures you can provide as a client. If you've been caught short in the past you might have an issue."

According to sources, evidence of higher retentions and the increased cost of UNL retro is already emerging.

Continental giant Munich Re, for example, is understood to have put a submission out to the market that looks to limit the increase in retro spending to 15 percent.

The reinsurer is thought to be planning to raise its retention while buying higher up to keep within its new budget.

The supply side of the equation, meanwhile, is being impacted by the loss activity of incumbent retro writers - particularly those operating on a collateralised basis - and by a number of proposed new capacity providers not making progress in raising capital.

Collateralised writers that have experienced significant 2011 losses from events such as the New Zealand and Japanese quakes and the Thai floods need to reload to meet 1 January renewals, as existing capital is locked in for pending payouts. "If money is tied up in trusts from loss activity and it's not crystal clear to the investor community that the going forward market is going to be a slam dunk it could be somewhat of a struggle," one market source suggested.

Despite the potential supply constraints, BMS broker Stefano Nicolini suggested: "The capacity is there, but it's about the structure and price."

He added that buyers would look beyond UNL cover to secure protection where there is a shortage of affordable supply.

"I expect there to be some holes in the UNL retro programmes people are seeking, then they should turn to the industry loss warranty market to plug the gap," he said.

There is also a suggestion that reinsurers drawn by attractive returns are looking to allocate capacity to write some UNL worldwide ex-US retro.

Either way, it looks like a late renewal.

"There hasn't been a lot of definitive quoting taking place, so it's going to be a really busy few weeks - it's going to get very crowded and pretty tense," the retro broker predicted.

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