Swiss Re Insurance-Linked Fund Management

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ILW demand rising, prices could soar for Japanese wind triggers


Indicative pricing for Japanese wind exposed industry-loss warranty (ILW) backed retrocessional reinsurance protection have risen significantly in response to the now consecutive years of heavy Japan typhoon losses, as well as nervousness over where current loss estimates will be finalised.

Reinsurance rate rises possible in 2018At the same time, we’re told demand for ILW capacity covering U.S. perils is up significantly in advance of the January reinsurance renewals, as a number of major players look to all natural peril coverage in index trigger form as a way to augment their retrocession programs.

With the retro market again impacted by losses and trapped collateral in 2019, resulting in a capacity crunch, we understand that there is significant demand building for retro aggregate products that may not be satisfied at 1/1, given the expectation retro capacity could be limited.

This is resulting in rising interest in protection in ILW or index form, while we’ve also heard interest in parametric structures for retrocessional needs has been seen as well.

In addition, some second event retro and ILW covers are seeing increasing demand currently, with likely rising pricing as well.

At the same time, pricing indications for these aggregate retro layers are up around 25%, we’re told, which has resulted in French reinsurance giant SCOR still waiting to place its aggregate layers while its occurrence coverage is now sealed.

Sources on the broking side of the market and some protection sellers have told us that if you’re looking to point at one market that is likely to be at least close to what we’d traditionally call “hard” it is the market for ILW’s covering Japanese typhoon risk, which typically breaks into life in Q1 of each year.

2018’s typhoons Trami and Jebi triggered a number of Japanese typhoon losses, with the potential for more to come.

Typhoon Jebi’s loss estimates remain a point of discussion, as one of the unofficial sources that are used as an ILW trigger remains close to the all-important $10 billion mark, with limits potentially at risk.

Of course, the generally accepted market loss estimate for Jebi is already much higher (at around $14 billion to $16 billion).

In addition, on prior year events and adding to general ILW market uncertainty, estimates for Florida’s hurricane Irma are being watched closely still, as there is a $20 billion threshold that still looks likely to be crossed. At this time we can’t confirm whether there are limits at risk of the Irma estimate rising, but there seems enough chatter in ILW circles that there could well be some trapped collateral exposed.

Now, we have the 2019 Japan typhoons Faxai and Hagibis to content with, which adds to the general uncertainty over ILW limits at risk.

With Faxai estimated as up to a $9 billion insurance and reinsurance industry loss and Hagibis much higher at up to $16 billion, there is the potential for more ILW market losses related to these storms as well.

We understand that the market is watching for estimates from Swiss Re’s sigma, Munich Re’s NatCat (the unofficial triggers) and also from PCS (an official and third-party supported estimate source).

As well as the single source input to a trigger, ILW’s often use the average of more than one source, so making specific trigger source incremental updates not always the defining factor in whether a contract faces a loss, or not.

Aggregate limits exposed also need to be considered, with ILW’s structured for aggregate retrocessional reinsurance coverage often having a franchise deductible set at around $3 billion, which both of this year’s typhoons have clearly exceeded.

All of which is adding to uncertainty, both over current ILW limits deployed and some limits still trapped after prior year loss events.

The result of which is rising indicative pricing, we’re told, with increases said to be ranging from 10% to 30%, or higher, depending on the trigger points.

It’s one area of the overall market where continued firming is possible, which is no surprise given the amount of ILW capacity lost, trapped and exposed over the last three years.

As ever, indications of pricing often don’t end up being where deals actually execute and while there has been ILW capacity lost and trapped, there remains plenty of capital interested in this exposure, particularly at the higher rates which look set to become available.

We’ll probably need to get a little closer to the main Japanese reinsurance renewals for a clearer picture of where Japanese wind and all natural peril ILW pricing will rise to, as by mid-Q1 the ILW market should have a much clearer view of the loss estimates of recent storms, whether or where Jebi (and Irma) will rise to, and how overall reinsurance and retro prices move at 1/1.

The fact demand is rising for 1/1 could also play out well for the catastrophe bond market, as any reinsurers looking to index triggers for retrocession capacity may find the cat bond market offers value at this point in the cycle.

Already one large index trigger cat bond deal from AXA XL has come to market, with more said ready to follow in the coming weeks.

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