Trapped ILS capital and severe cat losses creating retro market dislocations, warns AM Best

Severe catastrophe losses and the resulting trapped capital have created dislocation in the retrocession market, with the COVID-19 pandemic adding even more uncertainty for 2021 renewals, according to a new report by AM Best.

The agency noted that although the entire insurance-linked securities (ILS) market has been affected, the retro segment has been hit hardest as the capacity has tightened and rates have spiked.

The fallout of recent and heavy insured loss years, and the uncertainty about ultimate loss exposure, particularly for Hurricane Irma (2017), Typhoon Jebi (2018) and the California wildfires, has led to investors holding back capital.

This has contributed to rate increases of up to 30 percent for July renewals.

The retro market is estimated at $20 billion, according to AM Best, with the ILS market supplying approximately 75-80 percent of the capacity for this segment.

COVID-19 has added even more uncertainty to the retro capacity conversation for 2021 renewals, AM Best warned. "The combination of uncertainty regarding business interruption recoveries, along with the so-called pre-emptive trapping of capital based on the notion that a catastrophic event, in this instance the pandemic, is ongoing, will likely create additional strain on the supply of ILS capital and retro capacity." it said.

AM Best argued that traditional reinsurers with multiple outlets for deploying capital will be the beneficiaries of these market dislocations, as will ILS funds that have demonstrated their ability to navigate through the extraordinary circumstances the insurance industry has faced over the past few years.