ILS aggregate cover to fall at renewals as losses, trapped capital bite: ILS Capital Management

Ahead of another mostly virtual Baden-Baden reinsurance meeting, the discussions and predictions around what might happen at the forthcoming renewal seasons turned swiftly towards action.

It is clear that the upcoming negotiations are likely to represent something of a break from previous years as the industry looks to get to grips with the fallout from 18 months that have changed everything and dealt a series of losses to the market.

On the insurance-linked securities (ILS) front, the market remains beset on multiple sides with issues ranging from handling the string of unexpected natural catastrophe losses from flooding in Germany to Texas storms and another significant hurricane season, to trapped capital and its impact on available capacity.

John Warwick, managing director and partner of Bermuda-based ILS Capital Management, sat down with the 1.1 Club, Intelligent Insurer’s online, on-demand platform for one-on-one interviews with industry leaders, to discuss how the market is set up going into this renewal season.

After the pandemic

With the global economy beginning to show signs of recovery from the coronavirus pandemic, it is no surprise that the ultimate impact of the past 18 months on the re/insurance industry remains to be seen.

For Warwick, that is one of the issues weighing on the ILS market heading into the renewal discussions with clients which, alongside the ongoing problem of trapped capital, he predicted could lead to lower aggregate cover being offered from the sector.

“COVID-19 is still on everybody’s lips and what might be happening with that,” he said.

“The broker movement in the last 18 months has changed the dynamics a lot, because there have been a lot of what you would call ‘soft’ requests for proposal where the newer broking houses have had to come up with some innovative ideas for reinsurance in order to attract and get hold of the brokerage.

“A lot of new ideas are being floated around with regard to retention levels and sideways covers, etc. There’s definitely going to be a fall in the amount of aggregate cover that has been placed in the last five or six years as the ILS funds have trapped a lot of capital and have had some fairly significant losses,” he explained.

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Warwick highlighted the ongoing uncertainty around what the eventual financial impact of the pandemic is likely to be on the market, with claims still trickling through the system and ultimate losses still to be established.

He said that this uncertainty, in tandem with losses stemming from significant, and unexpected, natural catastrophe losses such as from flooding in Europe over the summer, were likely to be the main drivers of renewal conversations over the coming months.

“We don’t know what the eventual impact of COVID-19 is going to be because the original claims are still being adjusted. The hours clauses are being tested, the amount is still not known. From a reinsurance point of view, there hasn’t been a lot of reporting.

“That’s one sort of pressure. The other pressures we’ve had were smaller losses: derechos last year were an awkward one, as was Texas at the beginning of this year, and now the German floods being quite significant as well. They will all mean quite significant net losses to people.

“People are going to be addressing that. Plus on the specialty side, from a marine point of view there’s been a couple of decent losses in the P&I clubs. On both sides of our fences, we’re not looking at significant impact, but it does keep people interested.”

While the ILS market has expanded to cover significantly more losses over the last few years than it did in the developmental stages of the sector, Warwick thinks there is unlikely to be a surge of new funds dealing with cyber risks—despite increasing demand for coverage.

While ILS Capital Management as a company has spent some time examining whether it would be viable to set up cyber-specific vehicles, it has concluded that the market remained too underdeveloped for ILS funds to get involved at this point, he revealed.

“It’s a difficult class. We did a lot of investigation into it, and it’s probably too embryonic still for the ILS funds to cope with.

“You may have spoken to people in funds who are doing some, but not many people are writing in the funds and we certainly won’t be in the in the foreseeable future,” he concluded.

To view the full 1.1 Club interview click here