Tom Johansmeyer of PCS, Verisk Insurance Solutions, looks back at 2018 and what impacted the ILS market over the year, and forward to the next 12 months.
Trapped capital. Reloads. Wildfires raging out West while the wind, once again, blew in the East. And in the Far East. Last year was tough—made tougher by the fact that 2017 was brutal, with the development on that brutality showing throughout 2018.
In January 2018, just about everyone in the global insurance-linked securities (ILS) sector was telling me they really needed a breather. Instead, in the market there was continued loss development from the 2017 hurricanes and wildfires while simultaneously we had to address several new significant catastrophes in the US, Japan, and elsewhere.
Meanwhile, losses continued to mount in—and outside—the affirmative cyber re/insurance sector. The 2017 NotPetya malware attack ultimately became a loss event of more than $3 billion, edging out even the 2018 Japanese floods, which PCS estimates to be around $2.7 billion (still a work in progress).
In a lot of ways, 2018 was 2017 all over again: major losses wound up obscuring the real progress on innovation and growth being made by the ILS community around the world. If we don’t recognise the successful steps forward, they risk becoming one-off successes that ultimately contribute much less than they could to the overall maturation of the ILS sector.
Before we forget about the new ground broken in 2018, let’s refresh our collective memory so that we have a solid foundation for furthering industry innovation in 2019 and beyond.
First, specialty lines industry loss warranty (ILW) trading gained plenty of momentum. Following the first ILW using PCS Global Marine and Energy (http://insights.verisk.com/04GME17?source=intelils) in 2017, the PCS team can confirm that several were traded in 2018 and that they have become a staple for key players in the global ILS sector. The regular use of ILWs in the marine and energy space has the potential for further growth, offering an important diversification opportunity for the market.
Cyber, of course, was on everyone’s lips throughout 2018. The industry’s growing pains were palpable last year. The overreliance on quota shares for risk transfer finally began to give way to discussions of excess of loss and other approaches. Blunt-force risk and capital management can be effective in the early days of emerging risk adoption but eventually, risk-bearers want to find ways to hold onto a bit more premium and generate greater returns.
Last year, the industry began to realise that cyber risk transfer could benefit from a bit more nuance, and we expect to see much more variety, creativity, and optimisation beginning in 2019. Already, several players are having serious discussions about cyber ILWs, and the PCS team believes the first one should come this year.Once the first few have been completed, the cyber ILW market could quickly turn into a robust destination for ILS capacity, particularly because this form of capital provides some protection for systemic risks by taking it out of the global re/insurance market.
Finally, the many large losses from established property-catastrophe markets helped highlight the ILS sector’s hunger for diversifying risks—and the opportunity to digest them easily. The high concentration of losses in the US, for example, showed the need to source and manage risks from new catastrophe-prone regions, which led to conversations about Mexico and the Caribbean. With several catastrophe events in Japan all in one year, discussion renewed about the need for a reliable and independent industry loss index to support ILW trading, particularly among ILS funds.
If our sector makes the right decisions in 2019, we should be able to achieve improved risk and capital management next year and for decades to come.For these types of risk, 2019 should look a lot like 2018 did for cyber and 2017 did for marine and energy—a period of exploration and development of a foundation to support future capital optimisation activity. If our sector makes the right decisions in 2019, we should be able to achieve improved risk and capital management next year and for decades to come.
With the first reinsurance renewal of the year behind us, it’s tempting to fall back to the usual pattern of griping about rates not increasing enough, excess capacity changing the world forever, and no amount of US catastrophes ever being sufficient to change the rate environment.
The better move is to make a fresh start for a new year. Reflect on past catastrophes and their implications for the present, but remember to invest in the tools you’ll need to help you achieve profitable growth in a world of emerging risks.
ILS, Tom Johansmeyer, PCS, Verisk, 2018, 2019