Q2 cat losses to impact 2016 ILS market, claims panel

Natural catastrophes in the second half of 2016 could have serious impact on the returns made by the insurance-linked securities (ILS) and reinsurance linked investment markets this year, a panel of industry figures has claimed.

Des Potter, head of Guy Carpenter Securities (GC), EMEA, told the audience at the Guernsey-hosted ‘ILS Insight’ masterclass in Zurich that three large events in the first half on this year had created a scenario where further disasters, like hurricanes, in the later part of 2016 could lead to losses being incurred by some ILS funds.

Potter said: “If the second half, particularly the hurricane season, shows even a mid-size level of activity, I think you could see serious impact on some of the returns for some of the investors into these sidecar vehicles.

“There have probably been three reasonable-sized events so far; the largest being the wildfires in Canada and you can probably add to that some of the tornado hail events in the US and the earthquake in Japan. Each of those events is estimated to generate over $3 billion of losses to the insurance industry.”

He also said that the majority of this loss started with the reinsurance market, which in turn had retroceded some of that loss into the ILS market, either as its own industry-loss warranties (ILWs), as was the case with some of those involved in the Canadian wildfires, but also as part of the cessions in some global property cat sidecars.

“The impact in the ILS market is going to be relatively small, though. The losses so far, in the first half of the year, will just be within the expectations of the budgeted loss ratios of these sidecars, although the level of losses in the first half are probably running ahead of plan. So, we’re probably at an interesting stage of the year when we’re looking with interest at the activity in the second half,” Potter said.

Andreas Von Reitzenstein, underwriter at Credit Suisse’s ILS team in Switzerland, who was also on the panel, claimed that he agreed with Potter’s point, and added that the Canadian wildfires had surprised the market.
Von Reitzenstein said: “Nobody would have expected a wildfire to cause 4.6 billion Canadian dollars [worth of damage]. I think that was a surprise for everybody, especially for the primary insurance carriers there. They will see losses up to the second, third layers, which is quite an event for Canada. We will see changes in the Canadian market on the pricing, that’s for sure.”