Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

ILS industry recognised Florence would not be market-changing


The insurance-linked securities (ILS) industry and third-party reinsurance capital providers recognised that hurricane Florence would not be a market-changing event and reacted accordingly.

As a result there was no real panic buying or selling of exposed ILS assets, catastrophe bonds or otherwise, nor was there a rush of live cat and protection buying.

In fact, the ILS market dealt with the threat of hurricane Florence in a mature manner, keeping its investor-base well-informed as the storm approached.

ILS managers and those managing third-party reinsurance capital were seen to be utilising a wide-range of risk modelling tools and weather forecasts from recognised meteorologists to ensure the managers had the latest available view of hurricane Florence and as a result were able to keep their investors up to date.

In its own way, a storm like Florence that at first looked to pose a major Category 4 landfall threat, but ended up as a lower category and more a water or flooding than wind event, provided another valuable test for the ILS market.

As of September 10th or 11th the ILS market and cat bond investors were beginning to brace themselves for a potentially significant loss, as Florence traveled towards the U.S. with high category hurricane winds.

But over the next few days as Florence began to wobble and wind shear played a role, the outlook for strong hurricane force winds coming ashore improved and the threat to ILS assets diminished as a result.

End-investors got to see how their ILS fund managers responded to this challenging meteorological environment, providing another useful test for how they and their catastrophe risk analysis experts coped with the situation and understood the wealth of information that is always coming at you thick and fast when a hurricane is in the water.

The fact there was no significant signs of panic, a sell-off, or a wave of protection buying as Florence approached, is a good sign for the institutional investors backing the ILS market and investing in collateralized reinsurance or catastrophe bonds.

It shows a mature response with an ability to work through potentially difficult situations and make the right decisions.

Now that the early estimates of insurance and reinsurance market losses from hurricane Florence suggest something below $5 billion (excluding the NFIP costs) the impact to ILS funds and investors will likely be minimal.

There could still be higher risk strategies with a little more exposure to the loss, but even then this will not be a major event for the ILS market.

Even if the NFIP’s flood reinsurance program and catastrophe bond are triggered, Florence is still a small event for ILS and third-party reinsurance capital interests.

Representatives of catastrophe risk modelling firm RMS noted that the fact there was little in the way of live cat trading suggests the industry recognised Florence would not be market-changing, according to a report on a conference call hosted by Buckingham Research yesterday.

The firm said the impact to third-party capital from hurricane Florence would likely be negligible.

So Florence may serve to hurt primary insurers the most, some reinsurance firms next and the ILS sector the least, positioning the ILS market in a good place to exert its capital efficiency again at the January renewal season, as long as we don’t see any major loss activity in the interim period.

Every time a major loss threatens the ILS market, the institutional investors backing it gain greater comfort in the asset class by seeing first-hand how their fund managers deal with these situations and every time this happens the ILS managers gain new expertise in how to deal with them and how best to communicate effectively with their investors.

Also read:

Hurricane Florence wind & storm surge loss up to $4.6bn: AIR.

FedNat won’t tap reinsurance for hurricane Florence losses

Florence saw less ILW and live cat activity than other recent storms.

Hurricane Florence loss only $2.5bn (ex-NFIP), says Karen Clark & Co.

Reinsurance & ILS market share of Florence loss likely minimal: Analysts.

Cat bond index only fell 1.15% on hurricane Florence threat.

Hurricane Florence’s 1,000 year rains flood the Carolina’s.

Model mean projects $3bn to $3.5bn wind loss from Florence.

Hurricane Florence re/insurance losses will be manageable: S&P.

Hurricane Florence wind & surge insured loss potential put at $3bn to $5bn: Corelogic.

A handful of cat bonds traded on hurricane Florence approach.

ILS fund values fluctuate on Florence, threat now reduced.

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