ILS market responding to losses test, but it’s not ‘the test’ – WTW

The insurance-linked securities (ILS) industry is in response-mode as a result of the aggregation of major losses in the third-quarter of this year. But while the biggest test of the ILS industry to-date, it is not “the test” as none of the events alone were of the magnitude to drive a major shift in pricing, according to Willis Towers Watson.

ILS investors are making payments to cedents, managing their loss exposures, dealing with collateral, all while continuing to raise more capital for opportunities that emerge and preparing to make more reinsurance investments.

“Fund-raising discussions by existing investors have gone well as has the emergence (or reemergence in many cases) of additional investors who have been on the sidelines,” Willis Towers Watson Securities said in its latest report on the ILS market.

But this is not the occasion that we get to learn how the ILS and collateralized reinsurance market responds to the $100 billion loss event, for while the aggregation of events may reach that level the fact they are spread across a number of catastrophes means that the loss will be well-distributed across insurance, reinsurance and ILS or capital market players, the broker said.

“None of the tragic natural catastrophes in the third quarter was individually of the $100 billion loss amount that might trigger a major shift in pricing,” WTWS explained. “However, the aggregate losses from the quarter are likely to reach $100 billion. A magnitude that serves to remind the industry of the potential scale of losses it could face and providing an effective test of its capitalisation, ability to recapitalise and the resilience of the investor base.”

Bill Dubinsky, Head of ILS at Willis Towers Watson Securities, commented; “Even though this is not ‘that year’, the recent loss activity will provide some clues as to what might happen when it does occur, and we can say that so far ILS investors and traditional reinsurers have performed well, supporting insurers to serve their policyholders. In particular, I would point to the Mexican government’s FONDEN bond where the class A notes may see a total loss of principal, delivering $150 million of disaster relief where it is vitally needed.”

As a result of the aggregation of large losses, but not “the losses”, WTWS said that it doesn’t expect large-scale impairments of reinsurers or ILS investors to suffer massive catastrophe bond losses or insurance-linked assets under management (AUM) declines more broadly.

But the loss activity does help the market to understand and demonstrate its role, providing a valuable test of the ILS market’s infrastructure.

“The loss activity will provide some clues as to what might happen when a $100 billion-plus event occurs,” WTWS said. “The market will get to see how the different flavors of ILS perform with respect to different market segments.”

ILS capital will help to ensure a more stable insurance market overall, WTWS suggests, with the efficient capital helping to minimise the length and severity of any market hardening going forwards.