Roll call of 2021 cat losses threaten to burn through aggregate retro

There are mounting concerns in the retro market that an Ida loss that reaches $35bn on top of Uri and the European floods could fully erode industry aggregate limit placed when factoring in the buffering that collateralised writers will have to apply at year end, The Insurer has learned.

With the Ida loss also expected to impact occurrence retro covers, traditional and collateralised writers of the product are facing yet another year of losses.

Meanwhile, the expected trapped collateral issue at year end means ILS funds will have to re-up and find potentially several billion dollars of new investment to enter the renewal season with the same capacity.

As revealed by this publication last week, Property Claim Services (PCS) has released an initial Ida loss estimate of just under $26bn.

PCS loss estimates are based on actual data collected from the industry combined with trend factors, with the process repeated periodically as more information on the cat event becomes known and losses develop.

The expectation with Ida is that the loss will creep upwards over time, potentially into the $30bn to $35bn range in terms of private industry losses, stripping out the National Flood Insurance Program. That would be broadly in line with current top-end estimates from RMS.

The expectation reflects meaningful loss magnification factors beyond the typical demand surge seen after hurricanes, including inflated labour and material costs, as well as the great deal of uncertainty around developing losses in Louisiana – which currently accounts for the bulk of the estimate – and the northeast.

Sources have said that Ida losses are likely to be buffered at 150 percent at year end, which would effectively up an industry loss estimate of $35bn to $53bn.

With Winter Storm Uri’s industry loss of circa $12.5bn expected to be buffered on average at around 130 percent, and the European flood hit of a similar magnitude likely to be buffered at around 150 percent, the combined buffered industry losses could be close to $90bn.

The property reinsurance market is thought to buy retro to an exhaustion point of around $60bn in the aggregate in excess of $25bn in the aggregate, which would push the loss plus the buffer through the top of the notional tower when factoring in trapped collateral.

The occurrence retro market is estimated to be $60bn xs $15bn on an industry level, which could attach from the Euro floods on a buffered basis and is certain to see an impact from the larger Ida loss.

Actual limit on risk in the retro excess of loss market is thought to be in the range of $18bn to $20bn.

And the prospect of another capacity crunch in the coming months is likely to lead to significant upwards pressure on rates for aggregate limit – where it is available – and the occurrence product.

Different this time?

The retro renewal at the start of this year was expected to be tough, but rate increases moderated against expectations as capital was raised to bolster supply and demand pulled back.

More generally there has been a modest resurgence in collateralised participation via ILS funds at cat reinsurance renewals in 2021.

But there is not a great deal of confidence that after another year of losses funds will be able to sell the opportunity to investors with the same degree of success – especially in retro where it has been estimated that as much as $5bn might need to be raised.

“I don’t know how you sell worldwide aggregate retro as a viable product going forward. Who’s going to subscribe to that story?” asked one senior retro source.

Others added that with a month of the official hurricane season still to run, and the traditional peak of the wildfire season in the US yet to come, the sector could be at a tipping point – especially with broader concerns rising over global warming and the efficacy of catastrophe models.

“The question is whether the models are just fundamentally wrong because of global warming and whether everybody needs to recalibrate and base their pricing off the last five years of experience instead.

“You could say the underlying attachment is wrong, the structure is wrong, the model is wrong, the frequency assumptions are wrong, and the secondary perils are wrong. So you have to fix a lot of things to bring in a significant amount of capital in the short term,” a senior broking source warned.

There is also a sense of investor fatigue and a degree of demoralisation at some ILS funds after another painful year.

Rate and restructuring

Inevitably there is an expectation that pricing will rise meaningfully at the upcoming retro renewals and the availability of aggregate could be limited.

There is also likely to be significant restructuring of programs, with attachment points moving, simplification of structures and adjustments to try and ensure that secondary perils and frequency assumptions are better calibrated.

There is also the potential for Covid-19 to further complicate the renewal, after the can was effectively kicked down the road on potential exposures earlier this year.

If 2021 had run clean it might have been the case that retro writers would have allowed the issue to roll forward into 2022.

But now it seems unlikely that anyone with potential Covid-19 exposure through traditional or collateralised programs will be happy to renew without some kind of resolution after the impact of heavy 2021 losses.