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Covid-19 having ‘substantial’ impact on ILS, but growth still possible

Covid-19 losses are leading to trapped capital in the ILS sector, but new business areas like cyber may offer avenues for growth, said panellists at the Munich Re’s 12th ILS/ART Round Table on Tuesday.

Speaking at the company’s first-ever virtual version of the event, Ivan Bokhmat, European equity analyst at Barclays Capital, said Covid-19 was another test for the ILS market, with traditional players having posted $20bn-$25bn in losses.

Taken together with nat cat losses, 2020 will be another heavy year that sets the stage for rates to rise, he noted.

“The pool of capital is becoming restricted. There is going to be another maybe couple dozen billion of collateral that is going to be trapped on the capital side. There’s certainly going to be losses on the traditional side. All that would lead to prices rising,” he said.

Philipp Kusche, global head of ILS at TigerRisk, pointed out that Covid-19 had already had a “substantial impact” that could be expected to persist amid an imbalance in supply and demand.

Losses and asset volatility are reducing risk appetite, but can also lead to more demand for reinsurance capacity, he added.

“On the capital side, given that reduced risk appetite, we would expect also traditional reinsurers to have less appetite for assuming that risk and I think the same is true for ILS markets,” he said.

Collateral trapping is expected to be another substantial issue at 1 January renewals, especially in certain subsegments like retro, where trapping had already begun by the time of the 2020 mid-year renewals, he said.

Ewoud Bom, managing director of Achmea Reinsurance, said the full effects of Covid-19 on the ILS sector remain unclear, but the outcome would be tied to market fundamentals.

“[Whether] the ILS markets can offer us a solution will depend very much on the price and the demand and supply,” he said.

“In the Netherlands, Covid-19 is not a real topic. We have a lot of named perils policies and Covid-19 is excluded,” Bom noted, adding that for Achmea as a sponsor, the pandemic wasn’t a serious issue for its P&C business.

For Adolfo Pena, partner and co-head of reinsurance at Nephila, the bigger question facing the ILS market was not simply around changes to rates, but compensation for investors.

“We’re not saying people need to pay more for the risk, but what we’re trying to look into very carefully is to make sure that every risk that has been taken has been paid for and that investors have been fairly compensated.”

Amid this mix of factors, some recognise potential for parametric covers to play a role in providing pandemic covers in the future, but a host of difficulties stand in the way, panellists said.

Tom Johansmeyer, head of PCS, Verisk Insurance Solutions, said introducing that type of parametric cover would require a trigger based on either fatalities or casualties as well as a reporting agency that market participants trusted to assess political factors.

“You’ve got political risk in the government reporting process,” he said. “What I would do for the United States is use state and local health agencies and aggregate up to the total.”

However, defining the term lockdown would also present a challenge, if not a roadblock, Johansmeyer said.

“It’s literally impossible in the United States. We have more than 50 governments, not one, so you need to clearly define what that exposure is and tie that to some series of specific events,” he said, adding that similar issues exist in Canada and other countries.

“How a government responds to a pandemic will have as much to do with the party in power and the election cycle as it does with the common sense. In fact, common sense probably suffers the most,” he said.

Looking ahead, ILS may also find applications outside of natural catastrophes, particularly in covering non-cat risks like life and cyber.

“Cyber is one of the key risks for commercial and industrial risk, but we don’t see real demand,” Bom he said. “In our case the exposure we have to cyber is very limited, but we know that the CEOs and the COOs think cyber is one of the most important risks that have to find protection for.”

Still, the lack of ILS and reinsurance capacity is “the single biggest constraint” in expanding into areas like cyber, a risk for which insurers cede some 40% of risk to reinsurers, Johansmeyer said.

Despite those difficulties, panellists including Bokhmat said the pool of capital in the ILS market still appears likely to grow over the next five years.

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