Should uncertainty over eventual losses caused by the COVID-19 pandemic result in the trapping of significant amounts of retro capital at the end of 2020, the upwards pressure on rates in the market should be expected to persist, Philipp Rüede of Swiss Re said.
Speaking to us in a recent interview, Rüede, the Head of global reinsurance firm Swiss Re’s Alternative Capital Partners unit told us that further contraction in the availability of retrocession capacity would be a driver for more hardening in 2021.
On the subject of insurance-linked securities (ILS) capital being trapped at year-end, Rüede said, “Within the cat bond market we would not foresee any major issues.
“However, within collateralised reinsurance and in particular retrocession it is likely that capital could be trapped due to uncertainty on the eventual COVID-19 loss.”
It’s challenging to know just how impactful this ongoing uncertainty could be and there are a range of factors that will drive the amount of ILS collateral that could be trapped, as well as what type of structures would be most affected by this.
Rüede explained, “The volume of capital trapped will depend amongst other factors on the development of the pandemic for the remainder of the year (and if lock down measures are re-introduced), the wording of individual agreements and if the event can be considered “ongoing”.”
But if this becomes a retrocession issue again, after the recent years that have seen a large amount of collateralised retrocession capacity eliminated from the market through catastrophe losses and trapping, the effects would be felt widely in the sector it seems.
“If significant amounts of retro capital are once again trapped then we would expect this to increase the upwards pressure on rates across the reinsurance and retrocession markets,” Rüede told us.
– Swiss Re’s alternative capital assets managed near $2.5bn: Rüede.
– ILS capital influx beginning, expected to persist: Swiss Re’s Rüede.
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