Rates rise up to 50%, ILS capacity down at 1.4 reinsurance renewal: Willis Re

Reinsurance rates rose by as much as 50% at the 1.4 April reinsurance renewals according to Willis Re, but the insurance-linked securities (ILS) market is reported to have deployed slightly less capacity as some ILS funds dealt with redemption requests.

The Covid-19 coronavirus pandemic escalated right as the April reinsurance renewals reached their critical point of closing, resulting in some challenges in the market.

April 1st is a significant reinsurance renewal for Japanese business, among other regions and while the Covid-19 outbreak weighed on the renewals, broker Willis Re reports that the market still managed to deal with cedent needs effectively.

Reinsurers took a measured approach to the renewals, Willis Re reports, gaining “significant rate increases” on loss-affected accounts, in particular Japanese wind related, while loss free business saw only more modest rate rises.

The largest risk-adjusted rate increases were experienced on loss-hit catastrophe treaty reinsurance programs, with increases from 30% to as much as 50% for Japanese wind exposures.

Loss-free treaties saw less dramatic increases, Willis Re reports, with some even renewing at expired terms. More generally, these were up 10% to 35% for Japanese wind exposed contracts.

The Covid-19 impact was clear to the insurance-linked securities (ILS) market, Willis Re reports, saying that capacity provided through ILS funds and structures actually decreased slightly at April 1st, with some ILS funds reducing their renewal offer because of recent investor redemptions.

Some ILS funds have been facing redemption requests in recent weeks, largely from investors for whom the ILS asset class is not core and that require cash and want to liquidate any investments that still hold value, as ILS and catastrophe bonds do being of low correlation with broader financial market factors at this uncertain time.

As a result, some investors have filed their redemption requests and while in many cases cash cannot be retrieved until later in the year, it does mean some ILS funds have had to adjust their appetites around the April reinsurance renewals.

At the same time some ILS funds have been buying cat bonds, as the more generalist multi-strategy funds sold out of that market in response to the coronavirus financial market declines, resulting in a sudden change of capital availability for collateralised reinsurance at this renewal.

More broadly at the April renewals, the reinsurance market’s response to the Covid-19 outbreak was impacted by timing and underlying coverage considerations, Willis Re explained.

Firm orders were completed without the addition of specific exclusionary language early on, but in later negotiations several reinsurers sought exclusions, the broker said.

The addition of specific exclusions were achieved in some cases, but in other Willis Re notes that buyers provided capacity providers with some comfort through letters of understanding, explaining that the underlying original policies have no exposure to Covid-19-related losses.

This was important to the renewals getting done in a timely manner this year, as any ambiguity over inclusion of Covid-19 claims would have put a stop to signings and held up the closure of many renewals.

James Kent, global CEO of Willis Re, commented on the market’s response, saying, “Having demonstrated its ability to manage the operational challenges of COVID-19 so far, the global reinsurance industry is well placed to demonstrate its ability to manage the longer-term financial challenge and continue with its mission of providing support to primary insurance companies and their policyholders.”