Best’s Commentary: ILS Retrocession Capacity Further Squeezed in the Pandemic Era

OLDWICK, N.J.--(BUSINESS WIRE)--Although the losses from previous years’ catastrophe events and the resulting trapped capital have been problematic for the entire insurance-linked securities (ILS) market, the strain is most visible in the retrocession (retro) segment, where capacity has tightened and rates have spiked, according to a new AM Best commentary.

The Best’s Commentary, titled, “The ILS Retro Market, COVID-19 and Pre-Emptive Trapping,” notes that the retro market is estimated at $20 billion, with the ILS market supplying approximately 75-80% of the capacity for this segment. The fallout of recent and heavy insured loss years, and the uncertainty about ultimate losses—particularly for Hurricane Irma (2017), Typhoon Jebi (2018) and the California wildfires—has led to investors holding back capital, creating dislocation in the retro market. This has contributed to rate increases of up to 30% for July renewals, according to AM Best’s discussions with ILS market participants.

COVID-19 has added even more uncertainty to the retro capacity conversation for 2021 renewals. The combination of uncertainty regarding business interruption recoveries, along with the so-called pre-emptive trapping of capital based on the notion that a catastrophic event, in this instance the pandemic, is ongoing, will likely create additional strain on the supply of ILS capital and retro capacity.

Overall, AM Best believes that the winner of the retro sweepstakes will be traditional reinsurers with multiple outlets for deploying capital, as well as ILS funds that have demonstrated their ability to navigate through the extraordinary circumstances the insurance industry has faced over the past few years.

To access the full copy of this commentary, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=300561.

Emmanuel Modu, managing director and global head of insurance-linked securities at AM Best, will join a panel session, titled, “Dislocation in the Retro Market and the Role of ILS” on Aug. 27, 2020 at 10:00 a.m. (EDT) (3 p.m. BST), as part of the Re/Insurance Lounge, an online forum from the Intelligent Insurer for insurance- and reinsurance-related discussions. For more information, please visit https://www.reinsurancelounge.com/home.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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