Active ILW market sees transactions rise in 2020

Perils head of Asia Pacific Darryl Pidcock outlines trends in the ILS and ILW markets over the past year.

What are some of the shifts that Perils has seen in the ILS and industry loss warranty (ILW) markets over the last 12 months?

The increase in ILS and ILW issuances this year has been widely reported. Perils’ experience supports this, as we have seen an 11 percent increase in limits at risk in the year to date, up from $2.9bn to $3.2bn. This increase is due to greater interest among protection buyers in ILS and ILWs using multi-territory industry loss triggers. In terms of ILW transactions, we have also observed an active market, especially for Europe and Australia with the number of transactions up compared to 2020.

European wind remains the dominant market with limits at risk increasing to $3.16bn, up from $2.9bn (in the overall figure of $3.2bn, Perils counts multi-territory limits only once). What is pleasing is the inclusion of secondary cat markets in several recent ILS deals. This includes New Zealand, which we only started covering in late 2019 but has seen an increase in limits at risk to $330mn, up from $155mn. For earthquakes in Turkey and Italy, we have seen an increase from $170mn to $490mn. We are also proud of the fact that Perils data has been used for the first time in an ILS deal for Canada following our merger with CatIQ in 2019.

What have been some of the key drivers of recent activity?

We have observed several factors that have been driving market activity this year. Firstly, the availability of investor capital remains quite healthy, which has made ILS pricing in particular more attractive to protection buyers. We have also observed many new protection buyers entering the ILS market, primarily reinsurers, while experienced protection buyers have continued to tap into ILS capital, taking advantage of current market conditions.

While ILW markets remain active, we have seen some protection buyers who in the past were more active in the ILW sector issue new cat bonds. Such deals have been executed relatively quickly, highlighting the improving market efficiency.

Also, as mentioned earlier, we have observed an increase in multi-territory ILS issues including secondary cat markets. This may reflect current market conditions being viewed positively by buyers seeking to cover secondary market exposures.

The increasing sophistication in retro buying is also reflected in the fact that 86 percent of transacted cat capacity as a proportion of total limits used structured industry loss triggers. One key benefit for structured industry loss triggers is lowering basis risk compared to conventional industry-loss-triggered protection.

Are there any other factors influencing increased activity in the cat markets?

Earnings volatility continues to be a key area of concern especially for reinsurers. Covid-19 has clearly had a significant impact on the insurance market especially from business interruption losses, while exposures such as cyber risk are increasingly demonstrating a loss potential that could severely impact the market. In such an environment, we would expect to see the observed uptick in the use of cat retrocession by reinsurers to protect their earnings from cat exposures using structured industry loss triggers.

What are your expectations for the remainder of 2021?

Our experience so far this year shows that there continues to be clear demand, especially among reinsurers, to access retrocession and cat markets through ILS and ILW transactions. The use of the various instruments remains an important component in managing cat risk especially using structured industry loss triggers where basis risk can be more effectively reduced.

We know from experience that cat markets are cyclical but at this stage we would expect further transactions to come to market leading up to the traditionally busy 1 January inceptions.

Perils has now been operating for about 12 years. How would you summarise the company’s impact to date?

Perils’ mission from day one was to improve the understanding of cat risk and modelling by making available industry exposure and loss data as well as enabling cat capacity.

Throughout this period, demand for our data has continued to grow with the number of licensees and markets covered increasing year on year.

In terms of enabling cat capacity, the total Perils-based limit issued since 1 January 2010 currently stands at $20.2bn, with 340 individual transactions using Perils. We believe this is clear evidence of the benefits of providing our services to the industry.