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Trapped ILS collateral issue may be overstated, suggests David Flandro


The fears of a substantial volume of ILS capital being trapped for too long so that it’s unable to be redeployed at the January 2018 reinsurance renewals, in light of recent catastrophe events, may be overstated, according to JLT Re’s David Flandro.

Following the devastating impacts of catastrophe events in the U.S. and the Caribbean, some market commentary has warned of the potential for insurance-lined securities (ILS) capital to be trapped as the losses develop, essentially making it unavailable to be deployed at the January 1st, 2018 reinsurance renewal season.

According to David Flandro, Global Head of Analytics at reinsurance broker JLT Re, the trapped, or locked collateral message is one mostly being spread by the traditional reinsurance players, and one that has a number of counter arguments.

“There are several problems with this argument. First, hurricanes don’t take that long to develop and it’s conceivable that most collateralised underwriters will have an idea where losses are by the renewal, and could secure a letter of credit (LOC) to underwrite with,” said Flandro, speaking during a recent global reinsurance conference call, held by Morgan Stanley Research.

Flandro agreed that there is certainly some validity to the argument, but as well as securing a LOC, he explained how there’s already second event ILS funds, that are filling gaps to take advantage of any pricing movements.

Additionally, the reinsurance market still has excess capacity somewhere in the region of $60 billion or more, according to Flandro, so that can also come in and replace some of the collateral that is still trapped at the key January 1st, 2018 renewals season.

It’s also worth noting, and something that was touched upon by Flandro, that the smaller, or medium sized ILS players owned by a larger company, are also able to quickly raise capital by simply asking the parent to come in and enable them to write more business.

So, while the argument has some truth to it and is certainly something that should be watched and addressed, Flandro highlights a number of counter arguments that suggest enough ILS capital is both willing and able to enter the space at 1/1 2018, in spite of any trapped collateral.

The impact of hurricanes Harvey, Irma and Maria, alongside the Mexico earthquake, is one of the first real tests for the ILS space, and it will certainly be very interesting to see how investors and sponsors continue to view the reinsurance market, especially the property catastrophe space, as the industry approaches the January renewal season.

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