Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Loss reserve adjustments impact some ILS funds in April


Some insurance-linked securities (ILS) funds continue to be impacted by the catastrophe activity of recent years, as the managers of the ILS funds factor rising ultimate loss figures reported by cedents into loss reserve adjustments for prior year events.

trapped-capital-imageWhile 2017 catastrophe losses are largely stabilised, except for in a few edge cases we understand, there are continuing loss adjustments flowing through related to catastrophe events from 2018 and 2019.

The most recent examples of this were seen in April, we’re told, with a handful of ILS funds having to adjust 2019 catastrophe loss reserves, on updates coming through from specific cedents during the month.

Some loss reserve adjustments have had to be made due to increases in ultimate losses from Japanese typhoons, we understand.

We’re also told that some may be related to the Australian catastrophe events of the latter part of 2019, including the severe hail storms and other events, which as we explained earlier today saw their industry loss estimates rise just in the last week.

On the Japanese typhoon losses, we’re told some updates came through after the April renewals, which have driven larger loss reserves to be required in a handful of cases.

We understand these increases have also driven some traditional reinsurance companies to increase loss reserves for the typhoon and related storms or floods activity as well.

Barely a month has passed in the last few years where at least one ILS fund hasn’t had to adjust a loss reserve upwards for a prior year event.

The consecutive years of major catastrophes has forced ILS fund managers to become adept at managing their loss reserves in a more dynamic way.

In the past, a major event might cause certain positions to simply be fully side-pocketed and held until a commutation, or a total loss notification was agreed.

Now, as loss creep has become such a prevalent factor across a range of catastrophes in the last three years, ILS fund managers have had to get used to adjusting loss reserves, while commutation or a final loss notification can still be some months away.

It’s taken almost three years for the loss reserves for the 2017 hurricane season to become more stable, although still some movement in these is possible as Irma continues to very slowly creep.

However, with the 2017 hurricane events, the majority of the reinsurance coverage has been used up already, meaning impacts are expected to be very slight from now.

As a result, any further ILS fund loss creep may now be more likely to be seen from 2018 and 2019 catastrophe loss events, with the 2019 events seemingly the ones driving most of the adjustments seen in April 2020.

Managing loss reserves has become an increasingly large component of the job of an ILS fund and is yet another point of differentiation. As too has the setting of sufficiently large reserves in the first place, with those taking creep for the longest perhaps looked on as not having had the greatest visibility of a loss when it first occurred.

Of course, depending on how reserves are being managed, every increase could drive more collateral to be trapped, as well as a dent to returns in the month where the reserve strengthening occurs.

So, for the ILS managers it remains preferable to reserve as accurately as possible upfront, but the complexity of recent year catastrophe events has shown that this isn’t always possible, no matter how hard ILS and reinsurance markets try.

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