Uncertainty over alternative capital’s role in 2019: Jeworrek, Munich Re

There is “rather more uncertainty over alternative capital’s role” in reinsurance and retrocession markets through the rest of 2019, according to Torsten Jerrowek of Munich Re, but the ILS market is expected to remain a “big and important” player in its key markets.

Speaking yesterday morning during an analysts presentation, Jeworrek, the Board Director responsible for reinsurance business at Munich Re, said that the participation of ILS markets in global reinsurance now looked more uncertain, as the market deals with the fall-out from losses suffered in the last two years.

“We see more uncertainty in their behaviour and the capacity they provide to the market,” Jeworrek explained.

But he noted that they continue to play a role in the market’s that have seen the most activity from ILS and alternative capital, largely the United States where he said ILS would remain a “big and important” market participant.

He explained why Munich Re sees uncertainty over the level of participation of ILS at upcoming renewals.

Jeworrek said, “Our explanations are, firstly that this is the second year in a row they’re affected by losses, which is a new lesson for the capital providers.

“Another explanation is that they wrote a lot of new business under the assumption they were exposed to events on the East Coast, but they underwrote many aggregate layers and these were exposed to the California Wildfires which was more unexpected from their perspective.”

He went on to discuss the impact of trapped collateral as another factor heightening uncertainty in the level of participation that ILS markets will have at future renewals this year.

Explaining, “Two years of losses in a row mean more capital is locked in, which means reinstatements and refills to the capital base is needed for the business, because these treaties are collateralised.”

Commenting on the renewals themselves, Jeworrek said that “markets remain rational” despite continued competitive trends, as evidenced by the fact that reinsurance and retro treaties that faced losses have seen rate increases of up to 10%, particularly in catastrophe business.

Given the major ILS funds largely continued to have significant amounts of capital to deploy at the renewals, its encouraging for their return potential in 2019 that loss affected accounts were in the main seen to experience price rises in January it seems.

Asked what the impact of the losses would be on the ILS market’s appetite for risk through the rest of the year, Jeworrek said right now any answer is speculation.

He said, “We see some early indication that the ILS market played and still plays a big and important role, region wide in the U.S., particularly the East Coast, and then in the retro market as well.”

“The retro market was the most visible signal that here some capacity of the ILS market was withdrawn, or changed,” he continued. “This didn’t have an impact for available capacity of the traditional players yet, but it remains to be seen whether those traditional player who rely on retro will have to change their own capacity in the catastrophe space.”

That is a very good point, as smaller reinsurers who rely on the availability of low-priced retrocession to offset the exposures they assume may find it harder to build such large books for themselves in 2019.

Of course this could provide an opportunity on the collateralised reinsurance side for ILS funds, if the ability to arbitrage the market using cheap retro goes away for the moment.

Jeworrek also noted that the wildfire losses came as an unexpected blow for some, impacting alternative capital through aggregate reinsurance contracts.

Saying that in January, “There were some indications that the ILS market withdrew or changed their capacity away from these aggregate contracts, which produced these losses, to catastrophe XL.”

Looking ahead, as you might expect, Munich Re does not fear the threat from ILS markets at the renewals.

“At the future renewals, such as April, whatever the ILS market will do will not have any effect,” Jeworrek said. “I do not expect them to be accepted in the Japan market at this renewal or any in the future.”

This goes a little against common knowledge of the underwriting some major ILS funds do in Japan, also their exposure to typhoon Jebi and other recent catastrophes suggests otherwise as well.

“The July renewal will be more interesting to see whether the ILS market will shift their capacity, or withdraw their capacity in total,” Jeworrek said, adding “There remains a lot of uncertainty over how much capacity will be bound.”