At the end of the first-quarter of 2019, the amount of insurance-linked securities (ILS) and collateralized reinsurance collateral still trapped by recent catastrophe loss activity amounted to roughly $15 billion, according to broker Aon.
The figure, while still high, is a reduction on the amount of collateralized reinsurance related collateral that was estimated to have still been trapped at the start of the year.
Global reinsurance broker JLT Re had estimated that as much as $20 billion of alternative reinsurance capital was trapped at the January 1st 2019 renewals.
While rating agency A.M. Best had said that as much as 20% of total insurance-linked securities (ILS) and third-party reinsurance capital that had been deployed for the 2018 underwriting year was trapped in funds and other structures at the start of 2019.
Hence, the figure from Aon of $15 billion, which on its estimate that alternative reinsurance capital sat at $93 billion at the end of the first-quarter of 2019, represented just 16% of the market’s collateral as still trapped.
This suggests that losses are increasingly being realised and paid out by ILS funds and collateralized reinsurance vehicles, a trend that is going to continue and will likely also speed up as well.
Not all of this trapped collateral will be paid out as losses either.
Some of it will be recovered, by the ILS funds and collateralized entities that have reserved most cautiously throughout the process of experiencing the severe catastrophe loss activity of the last two years.
Of course, there is also a chance that more capital gets trapped, as loss creep continues related to some of the catastrophe events and Aon notes that several continue to develop adversely.
In particular, typhoon Jebi, hurricane Irma from 2017 and hurricane Michael from 2018, are the three loss events most likely to continue to impact the ILS market over the coming months.
Further loss creep was recorded in relation to these events during the first-half of the year, but it is to be hoped that the impacts are now better understood and this will slow or stop.
When the adverse development stops and losses are realised at an increasing pace, we will see whether any of this trapped ILS and alternative reinsurance capital flows back into funds and structures to allow them to deploy it again.
We’ll also reach a turning point whereby trapping of collateral is outpaced by fresh inflows into ILS funds and vehicles again, after which further alternative capital growth should begin to be reported.
The catastrophe bond market has already reached this point, where it is now growing in outright size again having paid some losses and with other impaired bonds gaining a better picture of their potential losses by the day, as cedant’s loss estimates improve in clarity.