After another intense period of catastrophic losses, Intelligent Insurer examines how this has impacted on industry loss warranties and their role in today’s reinsurance market.
A
nother period of intense catastrophe activity in the first six months of 2011 has proved disastrous for many. But as rates in the traditional reinsurance industry respond, this is also true in
the Industry Loss Warranty market, which is also seeing rate increases. A recent JLT Re report noted that although “the vast majority of
reinsurers” have already blown their 2011 catastrophe budgets, Industry Loss Warranty prices have seen “increases across the board” from moderate to significant depending on the covered territories/perils, driven by “large-scale losses coupled with the recent model release of RMS 11.0 for US Hurricane”, along with “deteriorating combined ratios, uncertainty around pricing of risk and resulting impact on cost of capital”.
However, there are also more seasonal drivers to consider, argues Paul
Schultz, president of Aon Benfield Securities. “Clearly, as we get closer to the start of the US hurricane season, rates tend to harden in general, so this is a typical reaction in any underwriting area,” he says.
“We are seeing ILW rates, especially for US hurricane exposed capacity
and in particular Florida, probably up in the range of 20 to 25 percent. This hardening of pricing is due to capacity issues and an increase in ‘back-up purchases’ in retro and other types of back-up lines, which were required following the recent international losses.”
Current market conditions aside, ILWs have a number of characteristics
that have allowed them to grow in popularity as an alternative method of risk transfer, the foremost being their simplicity.
“From the buyer’s perspective, ILWs are an easy transaction to execute,”
says Stephen Velotti, chief underwriting officer at Juniperus Capital Limited. “Because they are an easy transaction, they require less infrastructure and staff to operate—for example, a bank could set up an entity to sell industry loss warranties within days of purchasing the industry loss data.”
In comparison with other insurance linked securities, due to their lower administration costs, ILWs tend to be considerably cheaper to buy than cat bonds and can be executed at a much greater speed.
“ILWs are what we would call a spot market purchase, where you
can make a decision to buy some cover and that can be transacted very quickly,” says Schultz. “The documentation involved is also pretty simple, so the ease of execution and ability which ILWs provide to trade in and out on an on-the-spot basis make this attractive cover.”
Current market conditions have also provided the potential for ILWs to
grow in the retrocessional market, according to Greg Habay, senior vice president at JLT Re. “In late Q2 2011, there was a little bit of a dislocation and shortage on the UNL retro side, with some capacity waiting on the sidelines which could come in and provide some relief during the second half of the year,” he says.
“Using syndicates as an example, their international portfolios have
been hit pretty hard on the catastrophe side. They are either through the first layer or even all layers of their programmes; hence, they are either in their reinstated limit if available or are bare and have no cover. This means that for them to go out into the market in late Q2 2011 and buy
September 2011 | INTELLIGENT INSURER | 51
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