December 11, 2017

Hurricanes could signal beginning of a new chapter for ILS: Milliman

In the future, the industry might well look back at hurricanes Harvey, Irma, and Maria as the start of a new chapter for the alternative capital, or insurance-linked securities (ILS) market, according to Aaron Koch, Director, Insurance-Linked Securities Group, P&C Division, Consulting Actuary, Milliman.

The high level of catastrophe losses experienced in the third-quarter of 2017 is expected to result in insurance and reinsurance industry losses of around $100 billion.

As a result of the high industry loss figure for the year, combined with the recent growth in alternative reinsurance capital, it’s expected that 2017 will be the first major test for the ILS space, with previous industry commentary questioning the sector’s claims paying ability and permanence post-event.

“For many participants in the alternative capital market – or equivalently, the insurance-linked securities (ILS) market – 2017 will represent the first major test of their risk selection and operational capabilities.

“Following HIM, alternative capital has an opportunity to prove its value and staying power,” said Koch, in a recent white paper exploring the impacts of the hurricane losses on the ILS marketplace.

Koch raises a valid and important point. Ever since alternative capital really started to cement its place in the global risk transfer space and claim an increasingly larger slice of the overall reinsurance market pie, recently estimated at nearly $90 billion, how it would react post-event has been a hot industry topic.

But as noted by Koch, the reaction of the ILS space following recent catastrophe events, including the willingness and speed at paying claims and the ability and willingness to redeploy for 1/1 and beyond, will support the sector’s attractiveness and boost the confidence and acceptance of both investors and the broader marketplace.

“The alternative capital market will share broadly in these losses, leading to what is likely to be the first year in the market’s history that it will deliver a sizeable negative return to its investors.

“While this will pose various operational challenges to participants, it also gives alternative capital funds a chance to develop reputation as reliable counterparties that pay losses efficiently and are committed to reinsurance for the long term.

“In time, we are likely to view HIM as the beginning of a new chapter for the alternative capital market,” said Koch.

Catastrophe bond issuance in 2017 has already broke records, with issuance at the half-way stage exceeding any previous full-year catastrophe bond issuance total, and at the same time the collateralised reinsurance market continues to expand.

The continued growth of various sub-sectors within the ILS space prior to third-quarter catastrophe losses supports the increased acceptance and comfort across the re/insurance landscape of the ILS asset class, and this will only be enhanced further should the marketplace show its claims paying ability and willingness following recent events.

Only time will tell just how much of an impact the hurricanes have had on the ILS space, but Koch said that it wouldn’t be a surprise “to see impacts of 10% and 35% of net asset value (NAV) for various funds.”

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