How market and catastrophe events impact pricing and RoL of industry-loss warranties

by Artemis on February 10, 2012

The industry-loss warranty market, particularly the rate-on-line (RoL) pricing of a contract, is a changeable beast which is impacted by many factors. The state of the reinsurance market, reinsurance pricing and also available capacity from traditional reinsurers and sources of retrocession is one deciding factor on the way RoL is headed. Catastrophe events, losses and potential impacts is another big factor. Other factors which impact this include the broader financial markets and even risk models.

The recently published ILW market report from reinsurance broker Willis Re (which we covered in detail here) contains one of the best visualisations on the ILW market over the last few years that we have seen. It shows the change in RoL pricing for an indicative $30 billion U.S. wind ILW contract over time from 2005 to the present. It shows a 20% increase in R0L from January 2010 to January 2011.

The chart (below) also shows many other events which Willis Re have seen influence the RoL pricing of an ILW contract over the last few years. It’s particularly interesting to see that we are back nearing the pricing peak once again and one has to wonder what impact the withdrawal of some capital market players could have if the wider financial market crisis spreads. Could we see a repeat of the 2007 ILW capacity crunch if that happened? Or would capital market capacity stick with the market this time around?

The ILW market report from Wills Re is well worth downloading to read in full, it includes some interesting data and insight and a larger version of this chart. You can download the report here.

Industry loss warranty rate-on-line over time

Industry loss warranty rate-on-line over time - Source: Willis Re

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