‘Inherent inconsistency’ in trapped capital and retrocessional capacity could cause ‘knee jerk’ prices

Reinsurers struggling to access investment and collateralised funds due to current global economic conditions could face “knee jerk” prices in their retrocessional cover, according to Nick Pomeroy, head of reinsurance and broking at Lloyd’s broker QRG Specialty.

Speaking exclusively to Insurance Times, Pomeroy observed that there had been a noted uptick in the use of collateralised funds by the reinsurance market in recent years – referring to the process whereby investors or third party capital providers offer funds to cover the potential claims that could arise from a reinsurance contract.

And although this model is typically “all well and good”, the weak global economic outlook is hampering access to investment funds, which – in turn – could lead to an “instant supply problem” and “a knee jerk reaction” in retrocession prices, Pomeroy noted.

The World Bank Group’s June 2025 Global economic prospects report confirmed that “the global economy is facing substantial headwinds” this year, with growth “slowing following a sharp rise in trade barriers and heightened policy uncertainty”.

The report estimated that global economic growth could worsen to 2.3% for 2025, with only a “tepid recovery” expected for 2026/27.

‘Inherent inconsistency’

Pomeroy explained: “There’s certainly been a change over the last few years with the amount of business done via the funds. You’ve got the collateralised funds [that are] all well and good in a loss free year – you just give the money back to the investors and then the same day, they give it back to you to reload.

“The problem there is if you have a major loss and the ultimate loss of the catastrophe has yet to be adequately ascertained. You’re [then] not going to be able to give your investors their money back, which is called trapped capital.

“That’s all well and good, but it’s much more difficult now in the global economic environment to actually access investment funds. So, if a substantial percentage of the retrocessional capacity is not able to renew, you’ve got an instant supply problem, which means the price going to have a knee jerk reaction – up it goes.

“There’s an inherent inconsistency in the pricing. It’s not something that gently ebbs and flows. It tends to be a quicker, harsher reaction.”