Two market factors are likely responsible for a slow-down in the use of industry loss data provided by PERILS AG, the excess capital in reinsurance has reduced the need for retrocession, while the rise of indemnity trigger popularity has dominated trigger use.
PERILS AG, the Zurich-based provider of industry-wide European catastrophe insurance industry loss data and indices, has seen limits-at-risk using its data decline as market trends have reduced the focus on industry loss based solutions.
At 31st March 2015 PERILS-based limits at risk sat at $3.7 billion, down 15% on 31st March 2014. Of this total, $2.7 billion (72%) is related to 144A insurance-linked security (ILS) and catastrophe bond transactions, while $1.1 billion (28%) relates to private transactions.
85% of the total capacity at risk used PERILS data for structured industry loss triggers, so weighted by country or Cresta zone and over 75% of the capacity at risk was acquired for retrocessional reinsurance purposes.
Use of PERILS data has been impacted by a number of market trends. Specifically PERILS highlights excess capital in the reinsurance market, which it says has resulted in less use of retrocession by reinsurers.
Also reducing the use of PERILS industry loss triggers has been the rise of the indemnity trigger, which has seen the majority of catastrophe bonds that come to market focused on providing indemnity cover. At the same time the rise of collateralized reinsurance has also meant more indemnity covers are bought, while industry loss warranty (ILW) use has declined a little.
PERILS explained; “The current soft market environment which, coupled with the abundant supply of capacity, changes the supply-demand balance for indemnity-based transactions.”
We’d add two more market factors to this, the continued rationalisation of reinsurance and retrocession buying among large cedents. Large European reinsurers and other property catastrophe reinsurance specialists have rationalised their buying habits, often resulting in bundled programs which are less suited to industry loss triggers.
Finally, the very low cost of European windstorm reinsurance protection in recent months has led to a decline in the number of European windstorm catastrophe bond transactions, an area where PERILS had seen strong growth while rates were higher.
Of course this could and will change. The reinsurance market cycle tends to move in waves and instruments such as ILW’s and industry loss triggers become attractive when market conditions dictate. Hence the very recent rise in ILW use in the U.S. for retrocession, coming after a period when reinsurance capital has been cheap and now suddenly markets realise they have an opportunity to be better protected.
This will no doubt occur in Europe too and result in an uptick in the use of ILW’s in the region. This may in fact be seen at the January renewals, as with pricing beginning to plateau markets looking for ILW or industry loss protection for European catastrophe risks would be well advised to take advantage of low rates.
PERILS continued; “Based on past experience, however, these trends can change moving forward. When this happens and the extent of that change is of course not something which can be predicted.”
Impressively, since the 1st January 2010 $10.7 billion of PERILS-based limits at risk have been placed in the ILS and traditional reinsurance markets.
PERILS intends to continue to focus on adding new geographies and perils to its market database, as well as working on new products. Its mission statement continues to be to increase the availability of catastrophe insurance data, improve the assessment and facilitate the transfer of natural catastrophe risks.