Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

With a major hurricane landfall approaching in 2020, why can’t I …?


Picture the scene, it’s August 2020 and major hurricane Laura is in the Gulf of Mexico moving over some of the warmest waters on the planet and forecast to intensify into a Category 4 storm before slamming into Louisiana and Texas, with Galveston Bay and Houston still perilously close to the cone of uncertainty.

Tropical storm Laura forecast path and tracking mapResidents in the path of hurricane Laura face potentially devastating impacts to property, lives and livelihoods, all under the continuing shadow of the COVID-19 pandemic.

As a result the insurance, reinsurance and insurance-linked securities (ILS) market is facing a potentially quite significant loss, as well as the possibility of complications related to loss adjustment and claims handling caused by an unprecedented pandemic at the time of a significant catastrophe event.

When a major storm threat is in the water the final 24 hours up to landfall can be critical for reinsurance, retrocession and ILS fund markets, who in some cases are informed and ready to take decisive actions on their portfolios and exposure, but in many cases the processes in the market still don’t support action at pace when it’s most needed.

It can also be critical for insurance buyers and other holders of risk related to natural catastrophe events, to also buy hedges and insurance products at the last minute. While prices are often so high to preclude coverage, certain buyers may find coverage at any cost a comfort when a major storm threatens.

Earlier we wrote that it’s now or never for live cat trading on hurricane Laura, which made me think about how it actually isn’t always that easy to achieve this anyway.

The processes are manual and require contact with often one or two people at a broker, people the average insurer or risk transfer buyer may not even know, making accessing just in time hedging capacity a challenge at best.

Reinsurance markets and ILS funds know each other of course, but the way the market works right now perhaps precludes them from achieving the efficient hedging strategies they might prefer to be able to execute at such a potentially critical time.

On the other hand, there are markets who just want to buy and hold, so a storm in the water is just another “squeaky bum time” (for those of a sporting nature) for these participants.

So, with all this in mind, the requirements of markets bearing catastrophe risk, as well as pure insurance and risk transfer buyers, to ready themselves for impending potentially significant catastrophe events, we ask, why, in 2020, can’t I?

– Look at industry loss warrant (ILW) pricing sheets that are somewhere close to the actual pricing that is available in the market at any one point in time? Obviously prices rise when a live cat situation emerges, but ILW price sheets are often far from realistic marks even well outside of the wind season.

– Get fast, near-instant, access to a range of quotes on industry-loss warranty (ILW) capacity available in the market that it is actually possible to buy? Of course this kind of functionality is now more possible thanks to platforms like Tremor, but yet to be fully adopted across the market or to become part of everyone’s hedging workflow.

Update: We learned after publishing this article that Tremor is planning to run a series of ILW auctions this afternoon.

– Visit an online platform where I can draw a cat-in-a-box type trigger outline, set trigger parameters related to wind speed, or catastrophe intensity, plus preferences around market preferences and price, then submit it to a panel of live markets and close the trade quickly, for a rapid source of parametric risk transfer protection. The key here is in not having to go to a single market to ask for a price from their tool (if you can even get the right people on the phone) and even being able to do this (poll a range of markets) indicatively would help encourage more trading liquidity.

– Do the same as the above, but for individual, corporate or commercial type risk transfer buyers (think buying protection for individual or clusters of offshore energy platforms and coastal energy installations, or a number of major onshore commercial assets), drawing your triggers, setting your parameters for payouts, and providing a way for commercial entities with significant exposure to price and perhaps buy last minute protection on an insurance or derivative basis.

– Same again, but for asset holders such as investment fund managers, who could want to hedge more easily the potential economic impacts of a major storm and may find doing so via a risk transfer instrument (parametric perhaps, or even based on an economic loss trigger) more effective than by trying to hedge specific asset classes, or commodities.

– List a catastrophe bond holding, that I want to get off my books, somewhere that the rest of the market can quickly and simply see what I want to sell and my desired price. Then get a broker-dealer to support me on trade execution, or preferably just trade it directly through an exchange.

– Get reasonable, clear advice on what investments I could make right now to offset my exposure. It seems re/insurers could use the asset side to offset the physical effects of catastrophes sometimes, but tend not to, perhaps fearing a hit to both sides of their business. But surely there are options that could be explored here?

Many of our market sources would like a storm in the water live cat trading scenario, like hurricane Laura, to be simpler, faster, more readily accessible and easy to access pricing on.

In addition, the insurance and reinsurance market owes it to the ultimate protection buyer to make last minute hedging simpler and more available, for those with the capital and funding to buy cover, for who the exposure is significant.

None of which means we’d see an avalanche of trading, but when you think that we’re in 2020 and I can buy and sell all kinds of assets online, raises some questions again for this marketplace.

Yes these questions are obvious, perhaps naive and may draw ire from some. But the re/insurance and ILS market does need to make better use of the technology available to it, to remove manual intervention where it’s possible to do so, making access to hedging capacity a bit simpler to achieve.

We’ll keep you updated over the course of today and you can track the tropics over at our dedicated 2020 Atlantic hurricane season page.

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