Florida ILW price indications up as much as 50% year-on-year

With the Florida reinsurance renewals fast approaching, it’s interesting to learn that indicative pricing for industry-loss warranty (ILW) protection covering hurricanes affecting the state is up significantly year-on-year, but actual market pricing may be flat or even down. Please read our update at the foot of this article.

The market for typically retrocessional reinsurance protection structured in industry loss warranty (ILW) form has been one of the areas that saw a contraction of available capacity and then hardening over the last few years, but the hardening actually seems to have been more significant through the second half of 2020 and into 2021 than it had been after the loss heavy Florida hurricane year’s of 2017 and 2018.

The ILW market has been cited as one area of reinsurance where attractive return opportunities exist this year and broker pricing sheets seen by Artemis suggest those looking to back ILW’s with their capital are likely to secure better rates than a year ago.

The Florida wind $20 billion industry loss trigger is one of the more popular one-shot ILW contracts and depending on which broker sheet you look at, rates-on-line including brokerage can be around the 20% to 22% range.

That’s up 50% on sheets seen from last May, when rates-on-line for a Florida wind ILW with a $20 billion industry trigger were seen as down around the 12% to 15% mark, we understand.

As ever, these are indicative prices from brokers, so not always where trades settled. In fact, sometimes the sheets can offer prices that are particular far off from the rates likely to be paid, as we highlighted a year ago when they didn’t reflect the broader Florida reinsurance firming seen.

But sources tell us that broker’s ILW pricing has moved much closer to the likely market clearing price in 2021, as efforts have been taken to keep the price sheets more up to date apparently.

So this year they do reflect firmer pricing for reinsurance and retro coverage in Florida, which is why the indicative rates are up significantly year-on-year.

The average increase in marketed price year-on-year, across a number of different brokers, seems to be around 30% across all the trigger points.

Some trigger points, such as a $50 billion Florida wind ILW, are up less than that, closer to 20%, while the more popular industry loss trigger points between $10 billion and $30 billion are all up 35% or more, year-on-year.

Which means the marketed ILW prices are definitely displaying something closer to the clearing price for Florida wind ILW’s, although we have no way to establish how close this actually is.

It’s expected that there will be relatively strong demand for ILW covers around the June and July renewals, so for those providing capacity to back them and ILS funds investing in ILW opportunities, the returns do look set to be higher (although again we can’t confirm how much, given the price sheets seemed to be running behind the market last year).

Of course, as the pricing was slow to get up to the pace of the market firming in 2020, it’s no surprise the increase in indicative rates-on-line looks so strong this year.

As ever with ILW’s, it’s best to contact your broker, or speak directly to a market, to find out exactly where prices currently lie and what a realistic clearing price could be around the upcoming renewals.

Update: We’re being told by market sources that market pricing for ILW’s focused on Florida wind are actually coming in below the pricing indications this year and in fact are now falling below the firm-order terms seen a year ago in some cases.

The reasons for this are largely capacity related, as in 2020 there was less available capacity for this type of product in the run up to the mid-year renewals, but in 2021 capacity has built higher and a number of markets have increased their appetite for ILW’s, given they are considered to be less exposed to the potential longer tail loss creep that has been evident in the Florida market in the past.

In addition, the tightening in the cat bond market has also driven more capacity to look to the ILW market, which is also driving price tightening there as well.

As ever, indications are just that, suggestions of where the market could clear and while the indications are definitely up in 2021 on their 2020 cousins, the actual market cleared pricing looks set to be little different y-o-y and down in some cases.