COVID reserving & nat cat loss creep affecting some ILS funds

In June and July we understand that loss creep related factors have continued to affect some insurance-linked securities (ILS) funds, particularly those focused on private collateralised reinsurance deals, as uncertainty persists over potential impacts from the COVID-19 pandemic and prior year catastrophe losses begin to crystalise.

We’re told that COVID related loss reserves were hardened across a number of players lately, as certain large ceding companies continue to add to their own reserves.

This remains an area of some dispute though, as ceding company reserves for COVID-19 pandemic losses, related to property business interruption, are in the main IBNR and not actual filed claims so far.

But we’re told that as ceding companies get increasingly nervous over the potential for some further claims and report that to their reinsurance partners, any ILS fund managers with a potential exposure are being proactive in setting aside provisions for this.

That’s positive for investors.

Firstly, as it means ILS fund managers are prepared for any increase in ultimate exposure to the pandemic. But also, as so many of these COVID-related reserves continue to be speculative and in some cases disputed, meaning they could turn into releases of value further down the line, depending on the eventual outcome.

These incremental reserves for possible pandemic business interruption are not significant in the majority of cases for ILS funds, collateralised reinsurers and reinsurance sidecars, we’re told.

More a case of tracking ceding company updates, than adding any significant new loss amounts.

On natural catastrophe exposures, we understand some aggregate reinsurance and retrocession contracts have seen deterioration due to loss creep on a number of prior year loss events.

As a result, ILS funds have increased their reserves for any exposure to these positions over the last month or two.

These loss reserves have been hardened for aggregate contracts with exposure to 2020 US catastrophe events, including severe convective storms, hurricane Laura and the midwest Derecho, we understand.

In some cases, these aggregate contracts are now reserved at their highest levels, meaning further loss creep cannot occur.

We’re told that these loss creep related effects have driven some ILS funds to much lower monthly performance, in some cases their worst since the February winter storms in the United States.

But, as the pandemic related losses remain uncertain and the impacts of aggregate contracts are now set to wane, as they reserve to their fullest for that exposure, some of these ILS funds will now be better positioned on a go-forward basis, with these exposures accounted for.