ILW prices rise for Florida wind triggers as renewal approaches

Indicative pricing for certain types of industry-loss warranty (ILW) backed retrocessional reinsurance protection has been on the rise, with Florida wind and as a result U.S. all natural perils seeing the largest increases of in advance of the mid-year renewals.

In 2019 there has been a scarcity of capacity for certain retrocessional reinsurance protection products, resulting in steeply rising prices.

The industry-loss warranty (ILW) market has been equally affected, with some sources telling us that ILW activity ground to a halt earlier this year while pricing adjusted.

It’s clear that the lack of retro capacity, particularly for peak U.S. wind and all-natural-perils, as well as at some more remote layers in the tower, has impacted ILW pricing as well, with some of these industry loss triggers seeing their prices rise in recent weeks.

We’ve analysed sources of ILW pricing and the majority of brokers have raised their pricing for Florida wind and hurricane triggers across the range of industry loss levels.

As much as 2% on-line has been added to a Florida wind ILW trigger at the lower levels of $5 billion to $15 billion, while more than 1% has been added to some brokers pricing for Florida wind ILW’s at the more remote end of the scale around $50 billion or higher.

These equate to ILW rates for Florida wind having risen by around 8% at the lower level, higher probability triggers, but at more remote levels the increases are of as much as 15%.

These reflect the capacity crunch seen in the retro market, as underwriters deploy their capital into indemnity retro deals, with the ILW market’s capacity suffering a little as a result.

Interestingly, while almost all Florida wind ILW triggers have seen their pricing rise, Gulf and East coast U.S. ILW triggers have remained static, a clear sign that higher prices are to be expected across reinsurance and retrocession in Florida property catastrophe risks at the upcoming renewals.

Reflecting the rising pricing for Florida wind exposed reinsurance and retro, U.S. all-natural-perils ILW’s have also seen price increases for the majority of trigger points.

Japanese earthquake ILW pricing is an interesting area to look at, as the pricing clearly dipped a few weeks in advance of the renewal in Japan across the majority of pricing sheets we’ve seen. But then crept back up to now stand roughly flat with the beginning of the year.

We can only imagine this is either a sales tool for brokers, who endeavour to attract potential protection buyers in advance of a renewal with lower pricing advertised on their sheets. Or the emergence of a market with an appetite for that particular risk and who was willing to offer lower-cost capacity.

Another interesting area of ILW pricing currently is for European wind ILW’s, which have seen pricing rise in recent weeks, likely following some of the recent wind storms that have affected northern Europe, particularly Germany.

That suggests a recognition that perhaps rates have been too low in the region for catastrophe exposed reinsurance and retrocession, which may provide some encouragement to those markets for whom Europe has become an underpriced region, dominated by large traditional reinsurance firms.

The increases seen in ILW pricing across Florida wind and U.S. all-natural-perils is clearly a reflection of the last two year’s of losses, as markets look to get paid a higher rate for peak U.S. hurricane risk and with all-natural-peril triggers this will also feature wildfire exposures as well.

Of course, ILW’s can pay out on an occurrence or aggregate basis and after the consecutive years of heavy losses another area of market contraction is in the availability of aggregate ILW capacity.

We understand that aggregate capacity for these industry loss triggers is severely lacking at the moment, suggesting it may be very hard to secure at the renewals this year without accepting rate increases in the 20% to 40% range, broking sources said.

Those aggregate retrocessional reinsurance covers have been extremely useful to some companies in recent years and a core part of protection for a few.

As a result, any markets willing to accept that risk could find the returns are significantly higher at this years renewals than in recent years.

Rising retrocession prices have been helping to drive increases in reinsurance rates at renewals so far this year. Hence these rising ILW indicative rates, suggest that at least Florida wind exposed catastrophe reinsurance renewals are set to rise in June, while other peril regions may increase as well in July.

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