ILS losses expected. It’s how the market reacts that matters

The insurance-linked securities (ILS) market is expecting pay its share of losses from recent catastrophe events, perhaps the most significant losses in the sectors 20 or more year history. But participants say they stand ready to support clients and explained today that it’s how the market reacts that matters.

Hurricane’s Harvey and Irma come on the back of a heavier year of losses, with U.S. severe thunderstorm events, a major Mexican earthquake, cyclone Debbie in Australia, among the range of events that have caused ILS funds and structures to pay a portion of the industry’s claims.

Speaking at the annual Munich Re ILS Roundtable event today, held in Monte Carlo at the Reinsurance Rendez-vous, speakers said that the market now has a chance to prove itself by doing what it was designed to do, providing protection for peak catastrophic perils and paying valid claims promptly when the worst happens.

Paul Schultz, CEO of Aon Securities, said that losses such as the hurricanes were “expected at some point” adding that “we are going to see some losses, especially out of Irma.”

That makes this a particularly “interesting point in the market,” Schultz said. But he went on to explain that he expects the ILS market to continue to function properly, with the sophistication and maturity evident in ILS likely to come to the fore as claims are paid.

“We do expect the market to trade through it,” Schultz explained, adding that this would be regardless of the size of loss, although the way that market trades could be “Differently, but in a healthy way,” while market participants come to terms with the size of their exposures to recent catastrophe losses.

Luca Albertini, CEO of ILS fund manager Leadenhall Capital Partners, said that a number of factors will determine how much of the Irma loss falls to ILS funds and structures and that it could mean some price rises are seen.

He said it’s not just the absolute amount of loss, it’s where it hits, saying that if it’s more of a reinsurance event then it’s more likely to have an impact on pricing.

Albertini also said that the technical matter of trapped collateral will have a bearing, saying that depending on the outcome of Irma as a loss event some markets could find available capacity reduces due to this and this could trigger some price increases.

Another factor is the relationship ILS markets have with their clients, which similar to reinsurers can mean some price amplification.

“Clients are focused more on relationships rather than on opportunistic price hunting, that’s on both sides,” he said, “Relationships mean if we’ve lost money there is a bit of a payback.”

Board member of Munich Re Hermann Pohlchristoph said that Irma could be the first proper test for the ILS market, adding that there may be some surprises but at the magnitude of loss expected he believes that the loss “Won’t change the market dynamic” but he also said it could have some price effects.

Alberto Valenti, Head of P&C Treaty Retrocession at Generali, said that the losses will demonstrate that “the relationship is extremely important.”

“It is extremely important to us to see the reaction, who will remain, will we have new players coming in,” Valenti said.

He said that market participants tell him that “ILS is not an opportunistic tool” and he said that “This is the right time to test it.”

But what’s really vital at this time is how the ILS market reacts to its biggest test and this is what both traditional and alternative reinsurance players are waiting to see, while the end-investors will also be watching for how the market unwinds this loss event and carries on going forwards.

Valenti said; “I think it is a good chance for us as a buyer, a sponsor, to see how the ILS market will react, how quick the payment will be and how it comparable to the behaviour of the traditional market.”

Mirko Sartori,  Head of Group Insurance Liability Management at Generali agreed, saying; “This is the time to demonstrate that the ILS industry or framework is ready to react and is ready to react how it has been implemented into the structure.”

Sartori said that this is, “Another step for the ILS industry to become even more important in the reinsurance market as an allocation of the capital overall.”

Albertini of Leadenhall explained that speed of claims is important, adding that “We want to respond quickly.”

It’s often overlooked that the ILS market is keen to settle claims as rapidly as possible to allow them to provide service to their cedent clients, while offering greater certainty to their investors.

Now is the time for the ILS market to prove itself under stressful conditions, responding to catastrophic events and protecting its clients, while also ensuring it can trade through it responsibly. Exactly what the sector has been designed to do.