Managers of insurance-linked securities (ILS) funds and other strategies are pushing back on what is seen as still excessive trapping of capital linked to COVID-19 related claims, as confidence rises that the eventual impacts of this will be relatively limited for the ILS market.
Back in 2020, as the COVID-19 coronavirus outbreak took hold, expectations were rising that some ILS funds and other collateralized reinsurance or retrocession strategies may have faced a significant level of trapped capital because of the pandemic.
The expectation was that a significant amount of insurance-linked securities (ILS) capital would be trapped on possible business interruption exposure triggered by COVID-19 related to property catastrophe reinsurance or retrocession programs.
It was thought that this would dent the ILS market’s capabilities at the January 2021 renewal season, which turned out to be largely unfounded as the market managed to trade through that period and many COVID-related ILS capital trapping discussions were pushed forwards in favour of getting the renewals completed.
Some collateral was trapped through 2021 though, largely on an incurred but not reported (IBNR) claims basis. We’ve reported before that some of these cases saw legal activity, as ILS managers disputed the trapping and denied that their contracts provided coverage for pandemic related business interruption anyway.
Now, a full year further on, rating agency AM Best reports that COVID-19 disputes continue and say that ILS fund managers are continuing to push-back on COVID-trapped capital claims made by cedents.
AM Best said that COVID-19-related claims reserve trends are leveling off and now stabilising across reinsurance and also ILS.
However, the rating agency continued by saying, “Incurred but not reported (IBNR) losses remain a significant component of COVID-19 claims, so ILS managers are pushing back on what they perceive to be excessive trapped capital—in some cases, going through arbitration for resolution.”
ILS investors still don’t expect to cover business interruption claims resulting from COVID-19, given the original intent of any ILS contracts that have capital trapped due to the pandemic was never to cover these types of events.
The process to resolve trapped capital can take time, but we understand progress continues to be made towards unwinding some of the trapping, while arbitration is ongoing in some cases to try and free other trapped capital related to COVID-19.
Even in traditional reinsurance, we understand that claims against catastrophe reinsurance layers for COVID-19 business interruption are continuing to lack progress and there seems an expectation in the market that many cedent claims will turn out to be futile.
As trapped ILS capital gets released it has been redeployed back into the market and has assisted some ILS funds that have had additional capital trapped due to catastrophe events from 2021.
The fact COVID-19 related insurance and reinsurance claims have not continued to escalate in P&C lines has helped here, as when a lot of the collateral was trapped by cedents it was at a time when forecasts were suggesting a much higher ultimate industry exposure to COVID-related business interruption.