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EventsMonte Carlo 2023

Rethinking retrospective reinsurance

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By James Dickerson, Global Head of Retrospective Solutions, Gallagher Re

Over recent years, legacy reinsurance has regularly made headlines; with several large deals placed by major insurers making waves in certain sectors. 2023 has been no different, with three +$1 billion transactions completed early this year and a raft of other deals following. Despite this, the legacy and retrospective market is often less well understood than the live market and, historically, such transactions had somewhat of a stigma associated with them.

However, many retrospective deals have had a meaningful, positive impact on cedants’ key KPIs, such as return on equity and balance sheet strength, whilst supporting rating agency and investor confidence. As a result, stakeholders across the market are witnessing the positive impact that such transactions can have and there is a notable shift to broader acceptance across the industry as a result.

The increased awareness of these placements is evident globally, with insurers ranging from multinational giants to regional mono-liners now considering legacy and retrospective reinsurance for capital, earnings or operational optimisation. There is also continued development of the solutions, with exciting and innovative deal structures that appeal to a broader range of cedants and reinsurers now available.

James Dickerson, Gallagher Re’s Global Head of Retrospective Solutions, commented: “The market’s appetite for retrospective solutions is changing. The buyers are increasingly established brand names, giving rise to significant deal flow and partnership opportunities.”

The cedants to which Dickerson refers are often looking for capital optimisation solutions, rather than treatment for distressed business. This trend was evidenced in the Insurance Insider and IRLA market survey conducted earlier this year.

Commenting on the dynamic he sees in today’s market, Michael Cane, Gallagher Re’s Head of Capital Solutions, said: “There is a heightened awareness of capital optimisation right across our clients’ businesses, from the C-suite to non-executives and those involved in setting strategy. In a harder rate environment, placing a reserve cover is an effective way of freeing up capital to deploy to write more profitable new business.”

Andy Rothseid, Gallagher Re’s Retrospective Solutions Global Chairman, added: “We are working on a number of proof of concepts that have the potential to redefine the placement of retrospective reinsurance; creating frameworks that provide the cedants with variable, multi-year, quota share cover for defined reserve portfolios. Such solutions provide the cedant with control to expand a placement over time, aligning the associated benefits to growth plans or other strategic objectives.”

Structures such as these have the potential to increase long term pricing certainty, provide greater cession flexibility and lower the overall execution risk and frictional costs for both the cedant and reinsurer.

“These concepts have really resonated with both our clients and the reinsurance market,” said Dickerson. “For our clients, this framework offers the prospect of leveraging reserve risk in a way they may not have previously considered. For the retrospective reinsurers it offers the prospect of more predictable deal flow from a planned series of transactions and the opportunity to establish a truly strategic long-term partnership.”

Linda Johnson, Gallagher Re’s Vice Chairperson for North America, hopes that offerings like this will help to drive a shift in the market’s perception of retrospective coverage.

“There will always be traditional ‘legacy’ deal flow focussed on discontinued or distressed business, where cedants seek finality to exit a business or line completely,” she said. “However, the innovative solutions that Gallagher Re is working on will support our clients where they don’t want finality, where they don’t want a complete exit. They may just want another lever to pull to support their growth or other strategic initiatives."