Analysis by CreditSights questions industry estimates that roughly a quarter of alternative reinsurance capital was exposed to losses from hurricanes Harvey, Irma, and Maria, adding that the majority of capital markets losses have been assumed by structures outside of the catastrophe bond space.
While still uncertain and subject to change, insurance and reinsurance market commentary suggests losses between $70 billion and $100 billion from the three hurricanes, which hit parts of the U.S. and the Caribbean during the third quarter of 2017.
The impact to the insurance-linked securities (ILS) space from the hurricanes remains even more uncertain than the industry-wide loss estimate, but rating agency A.M. Best recently said that it expects the alternative capital space to assume somewhere between $20 billion and $25 billion of the hit, based on an overall re/insurance industry loss of $90 billion.
In a recent report, CreditSights questioned A.M. Best's prediction that roughly a quarter of the overall industry loss will be assumed by the alternative reinsurance capital space, stating, "we have found it almost impossible to validate."
Regarding the catastrophe bond sub-sector of the ILS space, CreditSights analysts said it is too early to have a strong view on any deals that might be at risk, with an estimated $24 billion of the $30 billion+ catastrophe bond market representing the P&C space, with around $7 billion of this being focused on Florida risks.
"More importantly, a quick scan of recently issued cat bonds highlight the fact that most of them are currently Unrated which adds further barriers to any public disclosure. Unfortunately, this lack of transparency around alternative capital instruments is a stumbling point to quantifying the losses suffered by capital markets," said analysts.
Adding; "Nevertheless, we do not expect cat bonds to be face severe write-downs because of the relatively high trigger levels and the fact that each individual hurricane was not severe enough."
Ultimately, CreditSights isn't in any doubt that some cat bonds will be triggered by recent events (as has been witnessed), but stressed uncertainty surrounding the impact, with much of the loss to the capital markets expected to be assumed by other forms of ILS.
"Assuming that most cat bonds will not be triggered because of the relatively high trigger levels and the fact that each individual nat cat event was not material enough, we believe that most of the losses will be carried by other forms of alternative capital like sidecars, industry loss warrants (ILWs) and collateralised reinsurance covers," said analysts.
So, the message from CreditSights analysts is that while the catastrophe bond market has taken a hit from the hurricanes, albeit a smaller hit when compared with other and private forms of ILS, the lack of transparency across parts of the alternative reinsurance capital sector "is a stumbling point to quantifying the losses suffered by the capital markets."
It's incredibly difficult to know precisely how much of the losses from the hurricanes of 2017 have been shouldered by the ILS market, but the total is significant.
However, more significant is the way the ILS market has responded, reserved, paid claims and raised fresh capital to replace that which has been trapped, and prepared itself to trade forwards through the all-important 2018 reinsurance renewals and beyond.
It is not the size of the losses that matter so much as the way the ILS fund managers and investors are dealing with them.
So far it appears clear that the upshot of suffering the largest losses in the history of ILS is a larger ILS market. Once these specific catastrophes are completely paid out and dealt with, the ILS market will likely be larger still.
Does the difficulty in quantifying losses really matter then, with the ILS market less transparent than reinsurers who report their losses?
At this stage it seems not. The ceding companies have had their claims paid and returned to ILS players for fresh protection at 1/1, while investors have allocated more funds, suggesting that the all-important clients are more than happy with the way the market has performed.
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