Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Trapped collateral could cause ILS capital scarcity at Jan 2018 renewals


There are fears that trapped collateral could result in ILS capital becoming more scarce at the upcoming January reinsurance renewals, as to-date it does not appear that all of the ILS market’s capacity that has been eroded by recent catastrophe losses has been replaced.

ILS fund managers have been hit by catastrophe losses from hurricanes Harvey, Irma and Maria, as well as the more recent California earthquakes, resulting in negative months of return for some in August, September and October.

But potentially more of an influence on the state of the global reinsurance market at the key January 2018 renewals is the fact that a portion of the ILS market’s available capacity has been trapped as collateral tied to buffer loss reserves, meaning it is unlikely to all be available by 1/1.

The trapping of ILS collateral has been particularly evident in the retrocessional reinsurance space, with estimates suggesting that as much as $9 billion of collateralized retro limit was trapped or had been blown through completely.

But overall it is estimated that the loss to the alternative capital or ILS sector, from all of the recent catastrophe events, could be as high as $25 billion, a figure high enough to guarantee that replacing all of the affected collateral is unlikely to happen in time for the renewal.

Some ILS funds have been working hard to raise fresh capacity, to replace their share of the trapped and lost collateralized limit, with varying degrees of success.

Markel CATCo has raised over $2.3 billion of fresh capital, from existing and new investors, which should go a long way to ensuring the retro specialist hits the January renewals with a similar level of capacity to recent years.

Other ILS fund managers have also had success raising capital from existing investors, to replace trapped investments, but it’s unlikely that everyone will replace everything, which could mean there is actually less alternative capital available at 1/1, despite there also being a number of new start-ups and post-event ILS funds launching.

Speaking at an ILS Bermuda event in London this week, Andre Perez, CEO of ILS service provider and risk transformation specialist Horseshoe Group, said that he is surprised by how little capital has actually been raised so far.

Discussing the post-loss environment, Perez said that what, “Probably surprises me the most is the amount of new capital being raised. I have to say I anticipated a little more being raised than has actually been raised so far, or actually committed.”

“Trapped collateral is probably going to be the biggest issue at 1/1,” he said, discussing what will be the main factors influencing  the upcoming 1/1 reinsurance renewals.

Perez said that based on losses of around $15 billion for the ILS market, given ILS has around a 15% share of global reinsurance, he hasn’t seen the same volume coming back, “I haven’t seen $15 billion being replaced yet into the ILS space.”

“So you’re dealing with capital that hasn’t been fully replaced. You’re dealing with losses that are going to happen eventually. But more importantly I think, the trapped collateral is going to be north of that 15%,” he continued.

“The question is going to be how willing these cedents are going to be to release that collateral, or roll over that collateral,” Perez explained.

But overall he believes the market is set to trade forwards from the recent losses in a healthy way.

“At the end of the day it’s business as usual and I don’t anticipate any big issues aside from how much collateral is going to be released, I think that’s the biggest issue trading forwards,” said Perez.

Perez also discussed the level of losses being notified and said that so far at his firm Horseshoe they haven’t seen the level of losses they would have expected, but added that, “It’s starting to trickle in slowly but surely.”

One of the factors that defines how long collateral could be trapped or held for is the development of losses and notifications on the amounts cedants want to claim under reinsurance treaties.

If the losses are now starting to trickle through in greater volumes it could mean the collateral issues can be resolved more quickly. The pace of resolution will continue to speed up as we move further ahead and so collateral will gradually go to pay losses, or be freed.

However this may not be fast enough for 1/1 and so the reinsurance renewals may see ILS capital as a little more scarce than had been hoped for.

Of course for the traditional reinsurance players and those ILS specialists that have managed to raise more capital, or have less trapped, this will present an opportunity to push for higher rates, with any scarcity of ILS capacity a factor that will support the push for increased pricing at 1/1 2018.

Also read:

$9 billion of collateralised retro estimated blown or trapped.

Trapped ILS collateral issue may be overstated, suggests David Flandro.

New capital may not be willing to replace trapped collateral: Albertini, Leadenhall.

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