The industry loss warranty market has seen price rises across the board since the start of the year according to a report from specialist reinsurance broker and consultancy JLT Re. The report looks at the state of the reinsurance market including industry loss warranties after the 1st June property catastrophe reinsurance renewals.
JLT note that the extreme catastrophe losses experienced in the last 15 months have challenged the reinsurance market, putting an estimate on losses in this period of $105 billion inclusive of most recent events. This has resulted in 2011 catastrophe budgets being exceeded by the majority of reinsurers and JLT say that means some are “on a knife’s edge in terms of turning a profit for this year”. The losses combined with expected changes caused by new hurricane risk models means reinsurers have been rethinking the best ways to price risks, manage their costs of capital and drive return on equity.
JLT see industry loss warranties as “One of the best “bell weathers” for reinsurance pricing” and “very responsive to catastrophe-type events and provides value to buyers and sellers alike”.
Key factors that help understand the market dynamics for ILW’s, according to JLT, include:
- Tallying up of ultimate insured loss amounts from recent events (Japan, New Zealand, Australia, Tornadoes, Mississippi floods, etc.).
- Companies globally reviewing their view of risk and adequate pricing – this applies to the US, Japan and “diversifying territories”.
- A cautious approach and reluctance to deploy capacity by underwriters.
- Analysis on industry demand vs. supply affecting inwards and outwards business.
- Evaluation of excess capital positions, when applicable.
- Rating agency views.
- Revised Cost of Capital (CoC) and Return on Equity (RoE).
They note that the recent RMS hurricane risk model upgrade has resulted in significant changes to the industry loss curves. They say that a 1 in 10 year return period on RMS model v10 has now become a 1 in 45 year return period in v11. This significantly changes the risk profile for certain areas where industry loss warranties are sold and as a result impacts pricing. JLT note that the market has experienced some dislocation as it comes to terms with the changes and they have seen increased demand particularly in higher return periods and industry loss levels when compared to 2009 and 2010.
JLT estimate the following industry loss warranty price increases since 1st January:
- US Windstorm / All Natural Perils: +5% to +25%
- US / California Quake: +5% to +20%
- Europe Windstorm: Flat to +7.5%
- Japan Quake / All Natural Perils: +20% to 50%
- Japan Typhoon: Flat to +5%
- Cold spot ILWs: trigger thresholds increased from $3bn generally to $5bn-$10bn in the form of occurrence or aggregate covers.
Note: The analysis above excludes live-cat or dead-cat/post-cat ILW pricing.
JLT conclude on a positive note that the demand for industry loss warranties and other innovative forms of risk transfer for peak catastrophe risks continues to grow and they suggest pricing will stabilise as cash inflows to the retrocessional and insurance-linked securities sectors continue. In fact they note that the return of insurance-linked securities to the table and cedants increasing comfort with customised basis risk transactions will increase trading activity through the 3rd and 4th quarters.