Demand for traditional reinsurance remains weak among large ceding insurers and even some midsize companies despite soft pricing, leaving reinsurers looking for new ways to make up lost revenue.

Increasingly sophisticated buyers are retaining more of their risks, consolidating subsidiaries' programs, shifting from quota-share to excess-of-loss agreements and using alternative capacity, among other moves, market sources say.

The percentage of U.S. property/ casualty premiums ceded to reinsurers, sliding since 2011, totaled 12.9% of direct written premium in 2014, the lowest since 2000, according to a Moody's Investors Service analysis of SNL Financial data (see chart). The decline continues to pressure reinsurers already coping with overcapacity and fierce competition, Moody's said in a September outlook on the 2016 reinsurance market.

While there are some bright spots, including rising Florida property catastrophe business, “more generally, we will see less purchasing of reinsurance,” said Brian C. Schneider, a senior director at Fitch Ratings Inc. in Chicago.

That is leaving reinsurers looking to new coverage lines, such as mortgage credit risks, cyber risks, and stricter insurer capital requirements to spur growth. They also are offering terms, including multiyear policies, that are more competitive with insurance-linked securities and other forms of alternative capacity, sources say.

“I think we are seeing demand emerging in places people weren't expecting even a year ago,” said Bryon Ehrhart, CEO of Aon Benfield Americas in Chicago.

Large insurers have pared reinsurance programs for several years, in part to hold onto more profitable business in a slow-growth economy, observers say.

Chicago-based CNA Financial Corp., for example, has long consolidated subsidiaries' reinsurance programs to cut costs, raised retentions in some lines and abandoned quota-share for less expensive excess coverage, absorbing the more frequent, lower level loss exposure of the quota-share agreements, said Mark Verheyen, chief risk officer.

The trend among large insurers has moved from quota-share to excess-of-loss to progressively higher excess attachment points, he said.

In a more complex move, Ace Ltd. and investment bank BlackRock Inc. earlier this year established ABR Reinsurance Ltd. with $800 million raised in a private placement. ABR Re will assume part of treaties covering Ace's primary insurance, removing that business from the professional reinsurance market and boosting underwriting profits for Ace, a 10% owner of ABR Re, market sources said.

“ABR Re is not the first hedge fund-backed reinsurer, but its registration highlights more momentum toward shortening the chain between the capital market and insurers, bypassing intermediaries and putting pressure on established reinsurers,” Standard & Poor's Corp. said in a September analysis.

While sources note that only a handful of large insurers have the premium volume to support a vehicle like ABR Re, some midsize insurers are following some steps of their larger competitors.

Fort Lauderdale, Florida-based Universal Insurance Holdings Inc., which writes homeowners' coverage in Florida and eight other states, eliminated its quota-share reinsurance during its June 1 property catastrophe renewal, it reported in filings with the Security and Exchange Commission.

“We expect to increase our overall profitability by retaining more premium,” Universal said in the filings.

Heritage Insurance Holdings Inc. similarly said it had shifted to excess coverage for its property cat placements with traditional reinsurers. While the fast-growing Clearwater, Florida, insurer increased its traditional reinsurance limits each year since 2013, it also increased its retention for the first cat event to $35 million this year from $9 million in 2013, and added cat bond coverage last year to its program, which now totals $1.76 billion in limits, according to its SEC filings.

Midsize and smaller insurers also are using collateralized reinsurance more often to replace traditional reinsurance, Fitch's Mr. Schneider said.

But not everyone sees demand falling among midsized cedents.

“The market is bifurcated,” said James Kent, president of Willis Re North America in New York. While demand from national and global insurers may be flat, “demand is actually increasing from the regional and specialty companies who are not only more reliant on reinsurance for their capital management needs but are also in growth mode.”

More competitive terms have also kept some large players in the traditional market. Allstate Corp. took bids for its June 1 personal lines and auto catastrophe renewal from ILS markets, but opted instead for more competitive proposals from traditional reinsurers, a spokesman confirmed. Several parts of the new program feature multiyear terms up to seven years, Allstate reported.

“Traditional reinsurers are starting to borrow underwriting terms from the ILS market in the forms of multiyear policies and inclusion of nonmodeled perils in traditional reinsurance treaties,” S&P noted.

Florida and other cat-exposed coastal states are becoming a source of growth for traditional reinsurers, said Aon Benfield's Mr. Ehrhart.

Florida's state-run Citizens Property Insurance Corp. has accelerated its effort to turn over coverage to private insurers, increasing demand for traditional reinsurance support, he said. Earlier this year, the Florida Hurricane Catastrophe Fund for the first time placed $1 billion in cat retrocessional cover with traditional reinsurers.

In search of new business, reinsurers are looking to U.S. government-sponsored mortgage lenders. Fannie Mae and Freddie Mac, for instance, have tapped reinsurers for credit risk coverage on mortgage portfolios. The programs, which now have about $3 billion in annual limits, may grow to $6 billion in limits and generate $2 billion in annual premiums, according to Aon Benfield, which helped place the coverage.

In addition, stricter insurer capital requirements — including A.M. Best Co. Inc.'s impending capital adequacy ratio and the European Union's Solvency II standards — are likely to prompt ceding insurers to seek additional reinsurance support to maintain their ratings, market observers say.

Whether any of these factors increase property/casualty premiums ceded to reinsurers, though, remains to be seen.

Given soft rates, higher ceding commissions for quota-share placements and other competitive terms, “ceding companies should be looking to cede more, not keep more net,” said Mark D. Lyons, executive vice president and chief financial officer at Bermuda-based Arch Capital Group Ltd. “The industry generally keeps more net at the wrong time.”