Willis Re Notes 25% Growth in Insurance Loss Warranty Market

January 31, 2012

A report from Willis Re in London points to 2011 activity as driving a 25 percent growth in Insurance Loss Warranties (ILWs) volume for 2012. The report estimates that the ILW market reached trading volumes of $6 billion last year, resulting in an estimated 10 to 25 percent increase in trading.

It explained that with trades hitting highs of between $2.75 billion and $3.25 billion during the crucial January first ILW trading season, the report “predicts that the 2012 market could experience peaks in trading volume and pricing equivalent to those seen in the hard market of 2006-2007, post-Hurricanes Katrina, Rita and Wilma.”

Henry Kingham, Executive Director, Willis Re Specialty and co-author of the Q1 2012 ILW update, expects pricing this year to be around 20 percent higher than 2011 levels. The report states that although the average Rate on Line of 15.5 percent predicted for 2012 falls short of the average 17.5 percent reached in 2007, the trend is for a strong year for the ILW market.

Kingham noted: “In the second half of 2011, there was heightened speculation on availability and pricing of retro capacity for the 2012 season, which – conversely to the late renewal in the traditional market –pushed ILW protection buyers into the market early to seek cover. However, once the ultimate net loss (UNL) renewal season began with gusto, the ILW market slowed slightly as clients and markets concentrated on renewing their traditional book of business. Despite the hiatus, at the time of going to press, the majority of 1 January UNL renewals had been put to bed and we have seen a significant uptick in ILW trading.”

Willis Re explained that ILWs “are private reinsurance or derivative transactions, triggered by an index of the total industry loss arising from a natural catastrophe. The ILW product has become increasingly popular in recent years as an efficient way to invest in a catastrophe related derivative product, and is viewed by many, particularly in the capital markets, as an integral part of a buyer’s exposure hedging strategy.”

The report predicts that for 2012, around 75 percent of the estimated $6.5 to $7.5 billion of ILW capacity traded will come from capital markets players, including those that use a fronting reinsurer to support a collateralized cover.

Kingham stated that the factors influencing ILW buying demand, pricing and capacity supply caused “significant pricing volatility on contracts at 1 January. This was caused by a record tally of natural catastrophe losses in 2011, vendor model changes and shifts in capacity caused by supply and demand fluctuations.”

He added that it is “difficult to distinguish between the impact of risk modeler RMS’ Version 11 US wind model and the wider impact of 2011 losses on ILW buying demand and capacity supply. However, we observe generally that loss-affected contracts experienced a 30-50 percent price increase in January and non loss-affected contracts were 10-20 percent up on a year-on-year basis.”

Source: Willis Re

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