There is a lot riding on whether claims emanating from the Covid-19 crisis filter through to the insurance-linked securities market.
Confidence in the sector would suffer significantly if claims from an unmodelled, and not-thought-to-becovered, peril such as a pandemic triggers losses.
The market has had one too many instances of that already. A brief reflection on recent history brings the California wildfires starkly into focus and the significant, and not accounted for, loss creep that accompanied events such as Hurricane Irma and Typhoon Jebi that led to three consecutive years of trapped collateral for ILS funds.
A withdrawal of investor interest would have significant implications across the (re)insurance industry at a time when pricing is already increasing. A cutting back of cat reinsurance capacity would add further fuel to the rate rise fire.
The second quarter and the lead up to the midyear renewal was always going to be a busy time for the ILS market, with Aon highlighting last month that some $4.1bn of issuance was set to mature during the period. Issuance that was pushed back from Q1 has only made Q2 busier, leading to concerns that Covid-19 related financial upheaval will mean there is insufficient investor support for deals that might have to be restructured or downsized altogether.
But, participants in our latest Covid-19 Roundtable explained, capacity for cat bonds remains steady. Consequently, the expectation is cat bonds that come to market, including those delayed from Q1, will get completed, although with investors seeking a higher expected return, the cost will be at the upper end of pricing ranges.
There is, however, talk of a capacity crunch in the collateralised reinsurance market, with writers adopting a wait and see approach earlier in the midyear renewal amid concerns of collateral being locked up from potential Covid-19 losses.
At the same time, investors may begin to look at opportunities elsewhere given Covid-19’s impact on the equities markets.
One thing is for certain: once the dust settles on the renewals, there remains plenty to discuss.
How can ILS structures ensure they are watertight for pandemics? More than ever investors will want to know with absolute certainty what is, and what is not, in portfolios of risk they invest in.
Out of adversity frequently comes opportunity though, and, provided investors are comfortable with the modelling, there is renewed talk of new alternative risk transfer solutions for pandemics coming to market, as well as the potential growth of the pandemic bond market. Is this perhaps a bright new future for the market?
I hope you enjoy this week’s roundtable – it is certainly an informative read.
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This edition’s participants:
Luca Albertini, CEO and Founding Partner, Leadenhall Capital Partners
Michael Halsband, Partner, McDermott Will & Emery
Dirk Lohmann, Head of ILS, Schroder Sequaero
Quentin Perrot, Senior Vice President, Willis Re Securities
Paul Schultz, CEO, Aon Securities