The industry-loss warranty (ILW) market can be a driver of diversification for the insurance-linked securities (ILS) market as a whole, with growth expected in specialty lines and cyber risks.
This is according to Tom Johansmeyer, Head of PCS, who spoke with A.M. Best TV at our recent New York insurance-linked securities (ILS) market conference, ILS NYC 2020.
Johansmeyer explained that the expected growth in ILW trading could come at an opportune time for the market as well, especially as retrocessional reinsurance capacity has been short on supply and only available at more of a premium in recent weeks.
“It’s definitely a capacity issue. What we’ve learned through the past 1/1 renewal was that there was a lot of demand for reinsurance, but we’re coming off the back of three years of major catastrophes,” he explained.
Discussing the need for diversification in ILS in order for the market to continue to expand, Johansmeyer said that in the past you’d just diversify a Florida book of reinsurance or retro business with Japan and think you were done.
“That didn’t work out so well,” he continued, saying that when it comes to diversification, “It’s going to come out of the specialty market, particularly large risk losses and cyber.
“Those are the two areas we feel there could be a lot of opportunity for retro to come through.”
Retrocessional reinsurance capacity remains scarce for some specialty perils, especially cyber reinsurance, Johansmeyer said, adding that the capital markets can fill this hole and the ILW is the ideal solution to help it in.
“You’ve got a lot of demand for cyber insurance and reinsurance. You’ve got a lot of demand for reinsurance and retro for large on-shore risk losses. But there really isn’t any retro capacity out there right now and it’s turned into a constraint that’s limiting growth all the way down to the original insured,” he said.
Cyber is one area Johansmeyer is particularly bullish on the development of an ILW market, in an area where one has not really existed to-date.
“Everything that’s come out so far has been interesting. We’re still seeing a lot of this proof of concept stuff around the peripherally, but we still haven’t seen the big large-scale traditional deals that can build up, particularly, a retro market.
“The real question is, are we going to see meaningful, substantial and scalable cyber ILS deals?”
He further explained, “ILW’s have traditionally made sense all across the retro market, from cat to the new stuff like cyber.
“You can get a chunkier rate-on-line, by writing some of the really meaty stuff that provides real protection into the market, you can get the 5, 6, 7, 8 rate-on-line deals that make sense for an ILS fund. Particularly an ILS fund that can only use that capital a limited amount because it’s tied up in collateral.”
Large onshore risk losses are another area Johansmeyer is bullish and believes ILW’s will be traded.
“We’ve seen the retro market almost dry up in this segment in recent years, because there was no good ILW reporting and UNL was scary to write.
“We’re looking to see more origination in large onshore risk losses, which will take an ILS market that was, say, below zero due to trapped collateral and dispute issues from Adnoc in 2017. We think that could become a robust market again.
“So, we’re looking to both large-risk and cyber, to bring a little bit of civilisation to those markets in 2020,” he commented.
“We need to start seeing the good, big useful ILW’s that reinsurers want to buy.”