ILS market could take up to $18 billion of 2017 hurricane losses

The insurance-linked securities (ILS) market could ultimately bear as much as $18 billion of the industry loss from the 2017 hurricane events, according to rating agency A.M. Best.

The figure is significantly higher than the expected catastrophe bond market toll, of course, which will be the largest cat bond loss in history but potentially only around $500 million.

But it is the collateralized reinsurance and retrocession space that will take the brunt of the losses from hurricanes Harvey, Irma and Maria.

A.M. Best estimates that the ILS market could take between $14 billion and $18 billion of the insured 2017 hurricane losses.

Based on an estimate of ILS market capacity of approximately $89 billion as of year-end 2017, this suggests the ILS market lost as much as 15% to 20% of its capital and capacity due to the storms.

Of course performance of ILS funds significantly differed, due to the range of investment strategies in the market.

Some ILS funds may have been profitable for 2017, despite the losses, but others could have lost as much as 30% of capital, or at least seen that amount trapped.

Hence the impacts to ILS markets from the 2017 events was significantly varied.

But the rating agency noted that this has already been replenished as more ILS funds have raised fresh assets under management (AUM) and as a result ILS market growth continues.

“Losses associated with HIM will continue to develop and the ultimate loss likely will not be realized for two to three years,” commented Asha Attoh-Okine, associate director. “Therefore the ILS market’s portion of that total loss also will not be known for some time. The ILS market has provided an answer to how it will react after a catastrophic event. The reaction of the market has been to provide additional capacity, thus moderating prices, which generally rise after a force majeure event in the property/casualty insurance sector.”

A.M. Best also noted that “The continued inflow of additional capacity has challenged the ability of traditional reinsurers to secure rate increases, which has typically occurred in the past following significant hurricane events or seasons.”

The rating agency also said, “ILS funds witnessed a dip in returns as a result of the 2017 catastrophe events, with negative returns being reported immediately after HIM. The impact of HIM as projected losses become actual losses continue to be distributed disproportionately across the various ILS market.”

A.M. Best also estimated that sidecars could take around $1.5 billion of the hurricane losses from 2017, providing sponsoring re/insurers with a valuable source of retrocession and reinsurance.