Industry loss warranty (ILW) market headed back to hard market peaks

by Artemis on January 31, 2012

The industry loss warranty (ILW) market is on the up in 2012 according to a report published by Willis Re, the reinsurance broking arm of Willis Group. Loss activity experienced during 2011 has driven buyers to seek protection and ILW’s are one area set to benefit, with Willis Re predicting growth of as much as 25% in ILW volume during 2012. The result of this growth will be an ILW market back at the peaks in trading volume and pricing last seen after hurricanes Katrina and Wilma in the hard market of 2006/7.

Willis Re estimate that the ILW market reached a trading volume of $6 billion during 2011. For 2012, given the ILW activity which Willis Re estimate at between $2.75 billion and $3.25 billion seen at the 1st January renewals, they predict that an annual trading volume of between $6.5 billion and $7.5 billion of notional limit should be expected in 2012.

Average rate on line (RoL) or pricing is expected to be up 20% during 2012, given the significant loss experience of the reinsurance market last year. Willis Re predict an average RoL of 15.5%, below the highs of 17.5% average seen in 2007, but still very healthy for the ILW market and they say 2012 should be a strong year. Price increases observed during the 1st January renewals were much higher on loss-affected contracts and peril affected regions, with some contracts experiencing 30%-50% price increases. Non loss-affected contracts climbed 10%-20% on a year-on-year basis.

Henry Kingham, Executive Director, Willis Re Specialty and co-author of the Q1 2012 ILW update explained; “In the second half of 2011, there was heightened speculation on availability and pricing of retro capacity for the 2012 season, which — conversely to the late renewal in the traditional market — pushed ILW protection buyers into the market early to seek cover. However, once the ultimate net loss (UNL) renewal season began with gusto, the ILW market slowed slightly as clients and markets concentrated on renewing their traditional book of business. Despite the hiatus, at the time of going to press, the majority of 1 January UNL renewals had been put to bed and we have seen a significant uptick in ILW trading.”

The report discusses the types of capital provider likely to be involved in the ILW market during 2012 and predicts that as much as 75% of the estimated $6.5 billion to $7.5 billion of ILW capacity will come from capital market players, including those using a fronting reinsurer to support collateralised covers.

On the factors which affect ILW buying demand, pricing, capacity and supply, Kingham said; “We saw significant pricing volatility on contracts at 1 January. This was caused by a record tally of natural catastrophe losses in 2011, vendor model changes and shifts in capacity caused by supply and demand fluctuations. It is difficult to distinguish between the impact of risk modeller RMS’ Version 11 US wind model and the wider impact of 2011 losses on ILW buying demand and capacity supply. However, we observe generally that loss-affected contracts experienced a 30-50 percent price increase in January and non loss-affected contracts were 10-20 percent up on a year-on-year basis.”

The report also discusses a growing appetite from protection buyers to lock in pricing with aggregate and multi-year covers, something we’ve discussed on Artemis before. Willis Re notes that locking in cover with an ILW can help retro buyers overcome scarcity in the retro markets. They also noticed heightened interest in ILW’s with aggregate trigger levels and multi-peril triggers. The trend for customised covers seems to be increasing and in some ways ILW’s are affording protection more akin to catastrophe bonds nowadays. It will be interesting to see how this trend continues.

The report from Wills Re is well worth downloading to read in full, it includes some interesting data and insight. You can download the report here.

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