A number of insurance-linked securities (ILS) fund managers have proactively marked-down some collateralised reinsurance positions, seeing a risk of potential exposure and perhaps even some losses caused by the Covid-19 pandemic.
Insurance-linked securities (ILS) funds and other collateralised providers of reinsurance or retrocession don’t have the luxury of a weekly pricing sheet (like the catastrophe bond market does) to help them in marking their books accurately to reflect changing global exposures.
While cat bond positions are quick to reflect any potential exposure due to a catastrophe event, or a developing exposure such as the coronavirus, it can be much harder to accurately reflect heightened risk associated with specific positions due to the potential for there to be losses in the collateralised reinsurance and retro space.
But we’ve learned that a number of ILS fund managers have already made a proactive move and marked down some positions, due to the threat of coronavirus related losses flowing to certain reinsurance or retro programs.
We’re told that ILS fund managers have been trawling through reinsurance positions held in the portfolios of their funds, to try and identify where any potential leakage of claims due to the coronavirus could fall.
With many ILS fund managers allocating capital more broadly across reinsurance than just in catastrophe programs, while others also write some specialty lines, broader property coverage and some have ventured further along the chain into primary insurance risks, there is always a risk of some exposure to the coronavirus pandemic emerging.
In the main, we understand that any actions take to mark-down ILS fund positions are on reinsurance programs where exposure would be expected, so likely away from the more core-to-ILS property catastrophe programs, or within other areas of property insurance and reinsurance where perhaps less robust exclusions and wordings on pandemic related exposure exist.
From our understanding and based on information from sources, at least three ILS fund managers have proactively marked their books already, perhaps more.
It should be noted that at this stage we understand that no losses have been notified under any contract, according to some of the ILS managers we’ve spoken with. Hence these actions seem precautionary in nature at this time, but may of course prove prescient.
But, the marking of portfolios still needs to take place to reflect the true risks at any single point in time and some ILS managers are being particularly prudent in trying to ensure they remain ahead of the game and mark early, to provide clear warning of the potential for exposure to their investors.
We understand some ILS fund positions had been marked in time for their end of March net asset values to be reported, which is particularly speedy under the circumstances.
Other ILS fund managers are expected to mark any positions they feel could be at-risk in their April NAV’s. Leaving it any longer than that could risk being left behind, so we expect a concerted effort across the market to understand if any exposure to their funds exists and if so where it may lie.
Without actual loss notices, this is a little like working in the dark, given the wide-range in quality of wordings and virus or pandemic related exclusions, across reinsurance and retrocession positions.
As we explained this week, it is likely to be the insurance or reinsurance policies and programs that lack exclusions, or have poorly worded exclusions, that find themselves carrying any claims through to the reinsurance and ILS market.
At this stage we’re told any mark-downs are likely to be a case of attritional losses being factored in for a number of the contracts felt more likely to perhaps face exposure further down the line.
Reasons for selecting specific contracts to be marked are likely to have come down to issues including: the region of coverage, some European reinsurance programs are seen as more exposed; the structure and type of coverage, with quota share arrangements seen as a potential source of claims leakage for certain ILS markets; the specific wordings and exclusionary language, or lack of it in some cases; as well as whether it’s understood already that the coverage provided would be broad.
Which funds carry the biggest potential for exposure among ILS funds? It’s very difficult to say at this stage, as there are so many variables at play and potential outcomes.
But those ILS funds investing in a broader swathe of risks from the property insurance and reinsurance market would be one group, as well as any ILS funds that allocate to some specialty lines of business, plus those investing in quota shares and sidecars where specific wordings and exclusionary language will be vital for defining what is covered, but may also prove inadequate to prevent claims contagion leaking in.
It’s worth quoting and reiterating something I wrote earlier today:
“For any ILS funds or vehicles taking some of those claims that do leak through and who haven’t adequately explained to investors that at the extreme tail there is a risk of correlation and unexpected losses, this could result in challenging conversations needing to be had.”
Finally, it’s interesting to note that the ILS Advisers Index of ILS fund performance is already down by -0.95% for March, based on reports from almost 63% of the funds included in it.
The average ILS fund performance in the month of March 2020 will be dragged down by catastrophe bonds, which faced pressure due to the heavy selling activity seen as a result of the coronavirus pandemic and financial market volatility.
But it is also possible that some of the private ILS funds investing in collateralised reinsurance positions also contribute to any March decline of this ILS fund index, as positions being marked down might erode the rest of their monthly results.