Broker Willis Re has requested markets, both traditional and ILS providers of reinsurance and retrocession, consider offering automatic extensions of in-force contracts by two months at the cedent’s discretion due to possible delays caused by the coronavirus to smooth the renewal process, but this is something that capital markets collateralised players would find particularly challenging to support.
We spoke with Dirk Lohmann, Head of ILS at global investment manager Schroders, to discuss this issue and drill down into some of the problems it raises for the insurance-linked securities (ILS) market.
The call from Willis Re is for markets to consider allowing extensions of a couple of months, on client request, at expiring terms and priced on a pro-rata basis.
Lohmann believes this isn’t feasible for the ILS fund market, given the collateralised nature of the reinsurance and retro coverage it provides.
“Regarding extensions of coverage for reinsurance or retrocession due to the coronavirus pandemic, we’re a capital market, a collateralised market and we cannot accept that,” Lohmann explained to us.
The contract renewals that his firm Schroder Secquaero are attending to currently are all proceeding as normal, Lohmann said, with remote working not causing any hindrance to the asset managers ILS and reinsurance underwriting operations.
Lohmann said, “Up to now we haven’t seen many delays in renewing contracts.
“We understand it’s important for things to run in an orderly fashion, but I don’t see any cause for alarm here.
“Although we’re all working remotely and from home, things are operating normally and functioning well for the renewals with no delay on quotes or binding.
“We don’t think asking for mandatory or widespread extensions is appropriate.”
Lohmann indicated that, “We will consider individual requests on a case by case basis, but subject to mutual agreement and not simply at the client’s discretion ”
The reason is due to the fully collateralised nature of most reinsurance contracts that ILS funds write, as well as the structural specifics of ILS fund operations.
“It creates issues for us, as we have to manage the liquidity of our funds. This would impact a collateralised position in terms of valuation at the end of the term and into any suggested extension as well,” Lohmann continued.
Seasonality is one of the factors affecting valuations, Lohmann said.
“If we came into the summer and are asked for an extension of a 12 month cover that incepted on June 1st, I earn much of the premium through the wind season, not pro-rata across a term. So, an extension period wouldn’t be paying a seasonality adjusted level of return.”
That’s not to mention the issues around collateral and needed liquidity in ILS funds around renewal times, for which this would cause a significant challenge, he further explained.
Lohmann believes that most markets, traditional and alternative, wouldn’t want to offer blanket extensions, although some traditional reinsurers may provide them on a case by case basis, for certain core clients that have been loss free throughout the year.
The idea is to make the renewal cycle move more smoothly, but here Lohmann doesn’t see any particular need for widespread extensions at this time as things are operating perfectly well remotely.
The issue of being asked to price pro-rate for say a two-month extension during the peak season of a perils risk profile is also a challenge.
Lohmann said that even where reinsurance renewals are delayed in the normal process of negotiation, industry practice has been to hold the client covered as the negotiations continue and once terms are agreed the cover would be charged for at the new rate as from the original anniversary date. Hence extensions of prior year contracts seem unnecessary he believes.
All of which perhaps goes to suggest that brokers like Willis Re need to quickly adapt their own processes to be able to service client renewal needs better, to avoid the need for any extensions.
Adopting electronic reinsurance trading and transfer of risks (as we explained yesterday) is one initiative that could make this a moot point, allowing for timely renewals and more renewals to be placed outside of the traditional cycle, thus reducing any burden at specific renewal dates.