ILW triggers on watch for typhoon Jebi, hurricane Michael & wildfire losses

by Artemis on December 6, 2018

The industry loss warranty (ILW) market is waiting nervously for confirmed estimates of industry losses to emerge for a number of recent catastrophe events around the globe, with certain trigger points on-watch and further ILW losses possible in the coming weeks.

question-marksThe ILW market, which largely provides retrocessional forms of reinsurance that trigger and payout based on estimates of industry impacts from catastrophes, has faced its share of losses ever since the major hurricanes struck in 2017.

Loss creep from hurricane Irma also delivered a blow to some ILW providers, tipping a few more positions into loss and now the ILW capacity backers are nervously watching a few specific trigger points for further losses in weeks to come.

The first trigger that may result in more ILW losses would be if the estimate of insurance and reinsurance industry losses from typhoon Jebi’s impacts on Japan surpasses $5 billion.

We understand that there are ILW’s in the market with a $5 billion trigger for Japanese typhoon risks, with these instruments typically using the Swiss Re sigma estimates we’re told.

As we wrote earlier today, Munich Re has issued an estimate for a $6 billion industry loss for typhoon Jebi, but it’s not clear whether any ILW’s would take this as an input to a $5 billion trigger yet.

However, specialist Bermuda based industry loss warranty (ILW) investment manager Mercury Capital has already reserved for this eventuality within its index that tracks the performance of a diversified portfolio of peak peril ILW’s, the Mercury investible Catastrophe Risk Index, factoring in the expectation of a hit from typhoon Jebi in its November 2018 figures (view the Index here on Artemis).

The broader reinsurance market is actually anticipating an industry loss from typhoon Jebi in a range from $6 billion to $10 billion, according to loss data collated by our sister site Reinsurance News and our market sources.

As a result of this, it seems almost certain that the estimate, from whichever of the major reinsurance firms is taken as the trigger input, will surpass the $5 billion ILW trigger point.

Charlie Griffiths, CEO of Mercury Capital, commented to Artemis, “We have reserved half of the index’s exposure to Japanese Typhoons during November, which is consistent with Jebi falling between a USD 5bn and USD 7.5bn industry loss.

“MiCRIX also has exposure to Florida hurricanes however based on the current information hurricane Michael is unlikely to have an impact.

“As an index of peak peril ILWs, the index has no exposure to the recent outbreaks of wildfires in California – one headache I’m happy to be avoiding in what has turned into another active catastrophe year.”

In addition, there are a number of ILW positions in the market that have a $10 billion Florida wind trigger and now hurricane Michael is being watched closely in case that loss estimate deteriorates and creeps higher.

At the moment the market expectation for an insurance and reinsurance market loss for hurricane Michael is in a range from $7 billion to $10 billion, but this is for the storm’s impact to all U.S. states.

There may be some U.S. wind ILW’s with a $10 billion trigger, but these are likely few in number (if any exist at all), we understand.

These will likely utilise a PCS trigger, but it is of note that Munich Re pegged the industry loss from hurricane Michael at $10 billion in its latest information on the storm.

As a result, we’re told that there is now more concern in the market over ILW’s that cover second events at the $10 billion level, as these may be hit if both hurricane Michael and the recent California wildfires deliver PCS loss estimates of over $10 billion each.

We’re told there would be quite a few ILW positions exposed to this aggregation of losses, as the $10 billion 2nd event ILW trigger is one of the more popular configurations in the market right now.

Of course, there could also be some U.S. or California wildfire industry loss triggers set at $10 billion as well, although again these ILW’s would be few in number, if there are any at all.

So ILS funds and investors that have backed ILW’s with these triggers, or exposure to the three relatively recent catastrophe events, will be watching developments and awaiting estimate updates with trepidation.

These losses, if they manifest, could add to the difficult year some are experiencing, but also help some others by providing much-needed protection and payouts to help the ILW buyers absorb impacts from these catastrophe events.

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