Risk trading based on industry loss triggers linked to hurricane Harvey’s eventual insurance and reinsurance industry toll continued last week, with so-called “dead cat” trades taking place and the focus of counterparties shifting to higher levels of loss.
As hurricane Harvey approached the Texas coastline there was some “live cat” trading activity, as re/insurers and ILS funds looked to lock in last-minute protection against a major industry event occurring.
The focus as Harvey approached was on industry loss triggers of $7.5 billion and at $10 billion, where rates-on-line of around 12.5% to 13.5% were reported.
After a catastrophe event has hit, but before the scale of the industry loss is clear, protection buyers can engage in so-called “dead cat” or “post cat” trades, buying a chunk of coverage based on an industry loss trigger. These industry loss warranty (ILW’s) are derivative or reinsurance contracts, quick to trade, but after an event has hit the potential for a certain magnitude of loss to manifest can be clearer, resulting in much higher pricing.
Patrick Gonnelli, Partner and Global Head of ILS Distribution and Trading at TigerRisk Capital Markets & Advisory told Artemis on Friday that a number of trades were seen in the market at higher industry trigger levels.
On Monday 28th August a $10 billion industry trigger post-cat trade was seen with a rate-on-line range of 26%-28%, so double the price for the coverage as was paid when Harvey was approaching land.
On Thursday 31st August a $17.5 billion industry trigger post-cat trade was seen, with a rate-on-line range in this case of 22-24%.
By Friday 1st September there were no markets willing to sell protection linked to anything less than a $20 billion industry loss trigger, reflecting the expectation that the final toll for private insurance and reinsurance interests was likely to keep rising.
Gonnelli estimated that more than $100 million of live-cat and dead-cat capacity had now traded linked to hurricane Harvey.
There has also been an increased demand for back-up reinsurance and retrocession covers, where those exposed that feel they might burn through a significant amount of their in-force protection look for an additional layer of coverage.
Gonnelli told us that there is ILW demand for covers to run until the year-end, as well as second-event protection.
Meanwhile the secondary catastrophe bond market has been relatively quiet by comparison, reflecting investors growing comfort that there are unlikely to be any losses to any exposed cat bonds.
With a major hurricane Irma now heading west across the Atlantic and some uncertainty over its eventual track, but many forecast models suggesting a week-end approach to the United States, getting protection in place to ensure they can withstand a second large industry loss event, is going to increase in priority for many re/insurers.
That could stimulate some more vigorous trading activity as Irma nears and if the forecast certainty increases and it looks like hurricane Irma will hit the U.S. then markets with capacity to offer could find themselves in demand, as there could be a lot of demand for hurricane Irma live-cat coverage.