Insurance-linked securities (ILS) funds may play a bigger role in providing aggregate reinsurance and retrocession protection in future, as an increasing number of traditional reinsurers are shying away from this, analysts at KBW believe.
Heavy catastrophe and severe weather losses, perceived rising frequency and severity of certain peril events, fears of social inflationary factors and the effects of climate change, are all seen as issues that have dented reinsurer and retrocessionaire appetite for catastrophe exposure, particularly on an aggregate coverage basis.
A recent report by KBW’s analyst team, led by Meyer Shields, focuses on their topics of conversation with reinsurance market participants around the virtual replacement for the Monte Carlo Rendezvous.
The KBW analyst team believe that the ILS fund market may fill any gaps as traditional reinsurance firms shy away from some areas of property catastrophe exposure.
In particular they cite aggregate covers as one area that ILS market demand may be able to pick up some of the slack as reinsurers reassess their portfolios.
Along side changing perceptions in risk at the reinsurer level, KBW’s analyst team notes that reinsurance demand is likely to rise, especially for covers to protect against volatility.
“We believe that primary insurers’ remain averse to earnings volatility, and expect these well-recognized risks to keep driving reinsurance demand higher,” the analysts explained.
KBW’s team note that the reinsurance firms they met with “expressed very little appetite for writing aggregate covers.”
These contracts have “broadly lost money during the last four or five years’ recurring elevated catastrophe losses,” the analysts continue, saying that these contracts can also be particularly challenging to model given the broad range of perils they tend to cover.
However, they don’t expect aggregate cover availability to dry up, however they note that “traditional reinsurers’ attachment points are rising.”
But perhaps soaking up some of the demand that still exists for aggregate reinsurance protection, KBW’s team said, “ILS funds will probably play a bigger role.”
What’s most likely to happen is that lower-down aggregate covers are going to become even more expensive and harder to secure, while higher-layer aggregates will have capacity more readily available.
Yes, the ILS market certainly can and likely will provide a decent proportion of these, but of the ILS funds we speak with regularly, a number are expressing dissatisfaction with the performance of aggregate covers over recent years.
This seems as true of aggregate reinsurance as it is of aggregate retro at this time. Although some of the more established aggregate industry loss catastrophe bonds, for example, look like they will continue to find plenty of support, given cat bond fund and investor appetite is high for deals from regular and trusted sponsors.
But for the more capital-challenged primary carriers that use aggregate covers lower-down, as a way to try and protect their surpluses, how easy it is to refill these layers at the next renewals remains to be seen, with the loss affected contracts likely to again come with steep rate increases, we suspect.
Price will be everything, in determining the availability of aggregate protection in 2022, it seems.