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ILW opportunity is there, if industry takes advantage of it: Johansmeyer, PCS


For industry loss warranty (ILW) markets opportunities are plentiful heading into 2023, but it’s up to the industry to take advantage of it as more concepts are expected to continue to gain traction, according to Tom Johansmeyer, Head of PCS, Verisk Insurance Solutions.

tom-johansmeyer-pcs-verisk“There’s plenty of opportunity, but the real question is whether the industry will climb out of its rut to take advantage of it,” Johansmeyer told Artemis in a recent interview.

Once again, he explained, both the ILW and cat bond markets are already in demand, and alongside catastrophe ILWs, PCS is working clients on specialty lines ILWs, including marine, energy, aviation, and terror (MEAT).

“Conversations about cyber and broader political violence ILWs are ongoing and even gaining intensity.

“With the increasing interplay between cat risk and political risk factors, seeing some blended, multi-pillared ILWs would probably make a lot of sense. For example, I could see value in a post-cat political violence ILW, with a dual trigger and industry loss for each component.

“It’s better to evaluate those structures now, particularly given the potential for post-cat political violence in the future. Climate change’s impacts on food and water security, for example, could accelerate risk at the catastrophe-political risk nexus,” said Johansmeyer.

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On cyber specifically, Johansmeyer explained that cyber ILWs remain an opportunity to mutually benefit protection buyers and sellers.

“For sellers, cyber is diversifying from cat and global financial markets, could command meaningful ROL, and offer an alternative to the volatility of both cat and other specialty lines.

“For buyers, the shortage of reinsurance and retro capacity has been a severe constraint on market penetration growth, with premium gains coming on a flat-to-shrinking market. It’s an unhealthy market dynamic,” he said.

Ultimately, Johansmeyer feels that cyber ILWs could help bring in the capacity necessary to return cyber to a reliable growth trajectory.

“However, buyers need to become more flexible with terms and accept that the inexpensive quota shares they enjoyed for so long are gone. Sellers need to accept that the model maturity in cyber may lag that of cat, but the performance of the cat market over the past five years suggests that it’s really time to try something new – even if on a limited basis,” he continued.

Away from the cyber world, Johansmeyer feels that composite specialty ILWs, such as the MEAT concept, will continue to gain adoption.

“The need for specialty cover is acute, and UNL retro may not be realistic based on the price of the underlying business and the limited capacity available. Pivoting more to ILWs could bring alternatives to traditional specialty retro capital providers, which retro buyers could really use in this market,” said Johansmeyer.

Expanding on the use of ILWs for lines outside of catastrophe risks, Johansmeyer told Artemis that he’s had conversations with clients about hundreds of millions of dollars in specialty ILW demand, across the MEAT lines of business.

“We saw the same dynamic last January, and few trades were ultimately completed. A month and a half later, the implications of unfinished trades became clear, with the conflict in Ukraine. Much of what was discussed likely would have triggered (pending further loss confirmation).

“A year later, geopolitical instability has intensified. Port accumulations remain a concern – particularly around Istanbul, these days. Missing an opportunity to complete specialty ILWs could again have a material impact,” said Johansmeyer.

All in all, Johansmeyer expects to see a flurry of demand around the upcoming renewals for ILWs.

“That’s usually the pattern, and if anything, I expect it to intensify this time around. Getting in front of the trend could significantly influence who gets access to ILW capital and who doesn’t. And while the discussion usually centres on cat, the same is true in the specialty ILW space,” he said.

Adding, “There’s clearly a role for shorter-duration private cat bonds and securitized ILWs. The market has been robust for a while now, and the risk that demand for cat bond capacity might outpace supply suggests that the role for streamlined securitization may be increasing.

“Investing some time into ILW/index trading platforms could pay off for years to come. Frankly, it’s something the market should’ve explored in more depth by now.”

View Artemis’ chart of historical and forecast future industry-loss warranty (ILW) price trends here.

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