Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Hannover Re estimates US $5bn to $10bn of ILS capital still trapped


Hannover Re, a major player in facilitation of insurance-linked securities (ILS) arrangements, via its fronting and risk transformation services using its balance-sheet, believes that trapped ILS capital amounted to between US $5 billion and $10 billion at the end of last year.

trapped-capital-imageIt’s a helpful estimate as the volume of trapped capital in the ILS market is very hard to track.

The figure had been estimated as high as US $15 billion to $20 billion in recent years, but that number had been dropping steadily as collateral was released and losses paid for prior year reinsurance and retrocession claims.

But there remained some more challenging to release trapped ILS capital, for events as long ago as 2017/18, as well as for issues related to the COVID pandemic and how claims affected certain property reinsurance towers. We’re told many of those issues are getting resolved now as well.

But in 2022 we had hurricane Ian as well, a major Florida storm loss that could have trapped significant additional sums of ILS capital and collateral.

We understand that Hannover Re has estimated that there was somewhere between US $5 billion and $10 billion of trapped collateral held for claims against insurance-linked securities (ILS) and collateralized reinsurance or retrocession arrangements that were yet to be settled.

This trapping was another driver of reduced ILS capital being available at the end of year renewals in late 2022, helping to provide further impetus for rates to increase.

Hurricane Ian is seen as a substantial portion of the trapped collateral total for the ILS market, we understand.

It’s a further data-point in helping us understand how the ILS market is progressing with its mission to unwind as much of the trapped ILS positions and collateral as possible, for paying claims, reinvestment, or returning to investors.

As this trapped collateral shrinks, the ILS market will also unlock some of the issues that have held back new capital inflows, as the trapping and release process gives managers of ILS capital a chance to demonstrate how they deal with reserving, claims payments and releasing reserves where they’ve proved more than adequate for the resulting losses they need to pay.

Recall, that we recently reported that lower than expected loss estimates related to hurricane Ian eased some concerns related to trapped ILS capital as the end of year renewals progressed.

Trapped ILS collateral related to hurricane Ian has since fallen further, we’re told, while at the same time there have been other releases related to prior year events, all of which helps to back up Hannover Re’s estimate.

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