Trapped collateral may persist, but new capital is out there: Willis Re execs

Trapped capital is expected to remain and pose an ongoing challenge for some investors and managers from across the insurance-linked securities (ILS) space, according to executives at Willis Re, the reinsurance arm of broker Willis Towers Watson (WTW).

With conditions continuing to trend more favourably for reinsurers as the key, January 1^st, 2021 reinsurance renewals fast approached, Artemis spoke with executives at Willis Re in the final weeks of 2020, about the trapped capital issue which continues to hinder the ILS sector.

As highlighted by James Vickers, Chair, Willis Re International, both investors and managers continue to suffer trapped collateral following catastrophe losses, and face a potentially larger challenge with further capital trapping due to uncertainty around Covid-19 losses.

“Given this uncertainty, many buyers will be extremely reluctant to release collateral at end of year, and will seek to roll it over, which means it cannot be used to support new business,” said Vickers. Adding, “Some fresh capital has been raised, but the retro market will not be as competitive, and therefore will be diminished as a lever to manage reinsurers’ bottom line.”

Paddy Jago, Global Chair of Willis Re, agreed with Vickers that trapped capital will remain and might do so for some time still, particularly in the retrocession arena.

But, he stressed, “new capital is still out there.”

“Our Global Pension Assets Study measured pension funds under management of $46.7 trillion in the 22 leading markets alone. Just 0.01 % of that is bigger than Lloyd’s. Those funds see an opportunity in insurance risk, but for them the issue is where to go and on what platform to deploy it,” explained Jago.

According to Quentin Perrot, Senior Vice President at Willis Re Securities, the question of the potential for trapped capital in sidecars and collateralised contracts, in spite of Covid-19, is not in itself a very big thing.

“The greater question is over the ways in which ILS structures transfer the risk that issuers want to cede and investors wish to assume,” said Perrot.

He went on to explain that as evidenced by the loss reporting issue, this is an area that requires more work.

“At present cedants may not be able to provide reliable loss figures for several months post-event, which creates huge problems for investors. It is the same for modelling. Investors use models to price specific ILS opportunities. This analysis must be taken into account when structuring the reinsurance. If advances in these areas are not made, and these same problems are encountered over and over again, ILS growth will cease,” he continued.

Recently, expectations of the volume of capital that could be trapped come year end had risen, driven by the aforementioned uncertainty over the pandemic and its potential losses for re/insurers, as well as an increase in the frequency of losses and total costs from catastrophe events in the U.S.

But as we explained recently, issues related to the potential for insurance-linked securities (ILS) collateral to be trapped over COVID had largely been postponed until after the January renewals.