ILW trading increased on higher pricing at mid-year renewals: Aon

Industry loss warranty (ILW) trading picked up around the middle of the year, as tailwinds drove higher pricing and increased demand also played a factor in driving volumes up, according to Aon.

The insurance and reinsurance brokers capital market unit Aon Securities reports that market pricing and clients willingness to pay more for coverage met at the mid-year, resulting in more active execution of industry loss warranties (ILW) around the June and July reinsurance renewals.

The year began with a dip in ILW trading, as prices and protection buyer ambitions failed to meet, which resulted in a year-on-year decline in ILW activity at the beginning of 2019.

But this turned around as the mid-year renewals approached, resulting in increased ILW trading.

Driving the increase was a narrowing of the gap between buy and sell price, albeit only by a small increment, Aon explained, but also contributing was an increased appetite from some of the brokers clients to buy ILW hedges.

This increased demand for ILW protection may have been as a response to the lack of retrocession capacity, but may also have been down to some ILS fund-to-fund trading activity as well, which we understand was a bit of a feature at mid-year.

The result of this has been a “tail wind” in ILW trading, resulting in a year-on-year increase in mid-year trading, taking in-force ILW limit to an estimated $5.5 billion to $6 billion, according to Aon.

Aon further said that capital market investors, so ILS funds, have continued to be a major driver of activity in the ILW market, both as protection buyers and capacity providers.

Fund-to-fund trading has become a considerable chunk of ILW activity, as ILS funds utilise the industry loss trigger as a way to hedge out their portfolio peak exposures and manage their risk appetites.

Aon said that the increase in ILW pricing seen at the mid-year renewals has been relatively across the board on ILW products, seeing it as a further correction following the 2018 catastrophe loss events.

These major losses have also changed the coverage in some cases, with wildfire in particular now often left out of deals and all natural perils ILW’s often now just covering named storm and earthquake risks.

Lower level and second or third event ILW’s are now largely transacted as just wind and quake deals as well, Aon said.

But with capacity levels still sufficient, Aon has seen no supply shortage in ILW capacity, just as long as buyers are willing to execute deals at capacity providers desired hurdle rates.