Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

ILW price sheets slip further from reality, don’t reflect Florida firming


We can’t speak for every reinsurance broking team that puts out a regular sheet of pricing indications for industry-loss warranty (ILW) protection, but many of the ones we’ve seen in the last couple of weeks (which include some of the bigger players) haven’t updated their price indications for Florida wind ILW’s since as far back as 2019.

Reinsurance rate increases at renewalsAs a result, we’re told by both traditional and alternative reinsurance capacity providers that the indications contained in a number of broker pricing sheets for ILW’s are more unrealistic than perhaps ever before, at this time of accelerated reinsurance rate firming.

Backing up, broker pricing sheets for ILW based retrocessional reinsurance protection were rarely accurate reflections of the pricing that capacity could actually be secured at.

Published weekly by brokers that have an ILW trading team, the price marks are designed to give cedents and markets a guide as to what are realistic places to begin price negotiations.

Often though, completed ILW trades would come in at higher pricing. Very occasionally at lower.

Of course, the pricing sheets are a marketing tool (we understand that), a hook to show potential ILW cedents where pricing could be, not necessarily where it actually is.

But right now, it seems that the pricing sheets have shifted further away from the reality of the marketplace than ever, especially given the significant rate increases being experienced in the Florida reinsurance market at these June 1st renewals and while the broader contraction in retrocession capacity continues.

As we explained recently, Florida reinsurance rates are seen to be rising by as much as 25% to 45% broadly, with some programs seeing much higher increases in pricing.

While, some reinsurers have been holding back capacity in the hope of finding better market conditions after the mid-year renewals, with ILW’s a target for capacity deployment.

At the same time, many are forecasting the rate firming to continue and for 2021 to be the hardest insurance and reinsurance market seen in years.

But still, according to some of the broker pricing sheets we’ve seen, ILW capacity is incredibly cheap.

Which of course it isn’t, given the state of the reinsurance market right now and the confluence of events that have constricted retrocessional reinsurance capacity.

Given reinsurance rates increased in January and again in April, plus now we have the effects of the Covid-19 pandemic to consider, which has raised the cost-of-capital for both reinsurers and capital markets players backing insurance-linked securities (ILS) funds, it seems unrealistic to suggest that you could secure a Florida wind ILW at the same rate as you could back in November or December.

But this is what certain broker pricing sheets are showing, the exact same price marks as they were in late 2019, in advance of the completion of the January renewals.

In fact, analysing some broker pricing sheets, some key trigger points for Florida wind ILW’s, $5/10/20 billion, are all around 20% or more down on where markets we spoke with said capacity would actually be available right now. Further in some cases.

Some ILW trigger points are even further out than this, ILW markets told us last week.

It’s understandable that pricing sheets are indicative and the market and cedents expect that.

But it would seem to a disservice to clients and also to the brokers themselves, for the pricing not to be updated more frequently and to at least more closely reflect the reality of where the market clears and what is actually achievable in terms of pricing at the time the sheet is published.

More trading could be stimulated if pricing were a truer reflection for the cost of ILW capacity at any one point in time, we believe and many of our sources suggest.

With ILW capacity in demand right now (rising all the time, we hear), having more accurate price marks available could encourage an increased number of cedents to look to the ILW market for hedging capacity, which right now could be particularly attractive as reinsurers look to buffer their balance-sheets against potential catastrophes occurring over the coming months.

With real ILW price indications becoming more available and transparent thanks to Tremor’s new ILW auctions, it would seem more important than ever for broker sheets to be reflective of true and current market pricing at this time.

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