EXCLUSIVE ILW REPORT: Vitality from volatility?
A report by Willis suggested higher rates on catastrophe business could trigger cedants to explore alterative options. Will a lack of capacity in the retro market drive demand for industry loss warranties? Intelligent Insurer investigates.
A report from earlier in the year complied by Willis Re, the reinsurance arm of the broker Willis, suggested that catastrophe rates in areas hit by heavy losses last year have risen by as much as 50 percent; even in non-affected areas, rates have increased by as much as 20 percent.
The report suggests that these increases are forcing cedants to seek alternative cost-effective options on some risks, especially on retrocessional coverage. This could result in some turning to industry loss warranties (ILWs), potentially driving up the use of ILWs by as much as 25 percent over the course of 2012.
More volatility during the recent year-end renewals meant plenty of demand for ILWs to provide coverage where the traditional reinsurance markets could not, argues Luca Albertini, chief executive officer of Leadenhall Capital.
“ILWs serve to square off the corners after the renewals and, given how messy this particular season was, I am sure that people will require some additional cover or will want to deploy some additional capital over the year,” he says.
“I would be surprised if the need for ILWs in 2012 wasn’t greater than before.” Not all agree that this trend will be as pronounced as the report suggests, however. Stefano Nicolini, senior vice-president of broker BMS, believes there is more capacity in the retrocessional markets than the report implies.
“After Baden-Baden and the Property Casualty Insurers Association of America (PCIA) meeting, there was a lot of concern about there being a shortage of retro-capacity,” he says. “This would have meant that ILWs would have been the first place that people looked for additional capacity. Nevertheless, I have not seen any shortage of traditional retro-capacity at the right price, and we have also seen a lot of people buying into the cat bond market.”
Nicolini also notes another interesting trend developing in the world of ILWs. He suggests that some reinsurers which previously bought ILWs are now also selling this instrument, in anticipation of a potential increase in demand for alternative covers from insurers and reinsurers.
“Because some insurers are buying less coverage from the traditional reinsurance markets, reinsurers have found that they have enough capacity to become sellers of ILWs, rather than buyers,” he says. But Nicolini does not rule out the possibility of a future rush to use ILWs, especially as past experience has shown that capacity can drop very quickly in the cat bond market, forcing insurers and reinsurers to look elsewhere.
“A couple of years ago we saw a situation where there was a lot of demand for cat bonds. Then, suddenly, there was no more capacity available,” he says. “We were getting closer to the wind season and people wanted to buy cat bonds but were not able to, due to a lack of capacity in that arena.
“That led to people panicking and coming into the ILW market, and this increase in demand led to a spike in the price for ILWs. So could this happen again this year? Sure it could. We could find ourselves in a situation where there is no more capacity in the cat bond market.” What will happen? Only time will tell.
