Covid-19 business interruption losses begin for some ILS funds

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A number of insurance-linked securities (ILS) funds reported small losses related to business interruption claims from the Covid-19 pandemic in July, with quota shares the main source.

covid-business-interruptionIt’s understood that some collateralised quota share reinsurance positions covering mainly European carriers have begun to see actual claims related to property business interruption and that a share of these has flowed to some ILS funds.

At this time the losses are not at all significant, but more are likely to follow as the European insurance and reinsurance market deals with business interruption impacts across property and business insurance, with the results being some flow of losses to reinsurance positions including ILS.

These impacts haven’t been sufficient to dampen performance for the ILS fund sector for the month, which as we explained yesterday recorded its best July return since 2011.

Overall, the expectation is that the Covid-19 pandemic hit to the ILS segment wouldn’t be much more significant than a mid-sized catastrophe loss event, but that is only expected to be the case should claims for business interruption begin to flow from U.S. litigation.

As we explained recently, after canvassing some ILS fund managers the consensus was that the business interruption hit to ILS is likely to be minimal.

Aside from the U.S., while the wordings around business interruption and exclusions of pandemic risk were less prevalent, or well founded, in regions such as Europe, the overall flow of losses to ILS funds and collateralised reinsurance writers is not expected to be particularly large.

The losses could flow for a while though, as it may take carriers time to make claims on any reinsurance arrangements, or for the losses to exceed their retentions.

ILS Advisers, who track the ILS fund market through its Index, explained that in July, “Losses on business interruption claims related to COVID-19 are starting to materialize, yet are not expected to be much larger than those of a mid-sized hurricane.”

Adding that, for the ILS fund market, “The key risk remains on potential business interruption claims via commercial property insurance policies.”

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