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ILS market optimism over ERCOT subrogation potential grows: AM Best


There is growing optimism in the insurance-linked securities (ILS) market over the potential for subrogation claims against ERCOT related to February 2021 winter storm and Texas freeze losses to reduce exposure to the event, according to AM Best.

winter-storm-weatherIn fact, the rating agency notes that there is a belief that should subrogation recoveries prove signficant, then some aggregate reinsurance layers may not even attach, reducing the ultimate exposure of both reinsurance and ILS markets alike.

AM Best discusses the issue in its latest ILS market report, highlighting the potential for subrogations to perhaps trigger an ability for some ILS fund managers to release capital that was trapped for potential losses related to winter storm Uri and the Texas freeze event in 2021.

As Artemis reported back in January of this year, subrogation recoveries related to the February 2021 winter loss event in Texas is seen as increasingly possible, perhaps even likely, after a lawsuit was filed against ERCOT by insurance and reinsurance companies.

Many of our industry sources said at the time that they expected some kind of payout would be the end result of the legal process, with the 131 insurance and reinsurance entities backing the lawsuit having a strong case for subrogation.

The insurance firms are suing for damages, to recover losses they paid out as claims to their insureds as a result of the property damage caused by the loss of power during the winter storm and deep freeze event.

In its new report, AM Best asserts that, “Optimism among ILS investors has emerged with regard to the estimated USD15 billion insured losses associated with Winter Storm Uri in 2021.”

The rating agency added that, “The 130+ insurance companies jointly suing the Electric Reliability Council of Texas (ERCOT) and dozens of power-generating entities for grid failure are increasingly confident that successful litigation or settlement may reduce insurers’ losses considerably.”

Which would cause a cascade of recoveries to flow through the market as ultimates are reduced, to account for subrogated claims.

In the past, this has been seen to flow down to the level of an ILS fund or investor, particularly in the case of the PG&E subrogation over California wildfire losses, when even some catastrophe bonds benefited as ultimate loss figures of their sponsors were reduced.

AM Best has learned that ILS market participants believe a successful subrogation case could make a difference to their losses from the winter storm events of early 2021.

“Some market participants believe that, if significant subrogation recoveries result from this litigation, the aggregate contracts might ultimately not attach to the coverage layers,” the rating agency explained.

There hasn’t been much news from the lawsuit itself since it was filed, but ERCOT has fought back against some individual claimants, so is likely to do so against the group suit as well.

Which means it could take some time before we see a resolution, but it is encouraging for ILS markets that optimism over a potential subrogation success is said to be growing.

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