The total insurance industry loss from the wreck and salvage of the stricken cruise ship Costa Concordia looks set to get very close to the $2 billion we reported was likely over a year ago which could increase any impact on ILS or ILW instruments.
Back in December 2013 we wrote that reports suggested it was likely that further loss creep would be seen from Costa Concordia, due to the complex salvage process and the possibility that the wreck would have to be cut up in order to be removed, which would increase the cost to insurers.
Now, the latest reports show that the cost of salvaging and disposing of the Costa Concordia wreck has risen by another $257m, taking the total protection-and-indemnity (P&I) insured loss to approximately $1.44 billion. Some escalation of the salvage cost had been expected, but reinsurers had factored it in at around $100m so this new jump in the Costa insured loss is at the high-end of expectations.
Added to a $500m+ hull insurance claim the Costa Concordia wreck and removal is definitely set to cost the re/insurance market very close to $2 billion. It is by no means guaranteed that there won’t be some further loss creep (although not too much more can be expected), which could take the final bill over the $2 billion mark, at which point there is a possibility that some additional instruments which are based on a loss trigger could come into play.
That might include instruments such as collateralized reinsurance or industry loss warranties (ILW’s). As we said before, there was some exposure to the Costa Concordia loss in the ILS and collateralized reinsurance market, through industry-loss warranties (ILW’s) and retro protections.
Some of these ILW’s and retrocessional reinsurance contracts had actually been settled, particularly a number at the $2 billion trigger where parties had correctly assumed that the loss would rise and a quick settlement was preferable to a drawn out creeping loss.
Any further loss creep is unlikely to worry the ILS market as a result of its tendency to try to settle quickly to free up collateral and give certainty to investors. In the case of Costa Concordia this will prove to have been a sensible move as the loss creeps.
It’s worth noting that the ILS market and ILS funds are increasingly finding room to participate in marine reinsurance renewals. With the size of cruise ships rising and container and other large vessels now worth well into the billions the potential for a major loss from the marine sector grows all the time. However it is a good diversification play for those ILS funds who increasingly look to specialty or new lines of business and we should expect the ILS markets participation in marine reinsurance to grow.
Currently the Costa Concordia is being refloated before being towed to its home port of Genoa to be dismantled. Insurers, reinsurers and any ILS players with exposure to a further creep in the loss will be pleased to hear that this task appears to be progressing successfully so far.