ILS can help London maintain cat portfolios as retreat continues

As many Lloyd’s and London market insurers retreat from the catastrophe space, amid elevated losses and the uncertain but increasing impacts of climate change, some underwriters could look to alternative reinsurance capital sources to help maintain their cat portfolios.

Insurance and reinsurance broker Howden’s London Market Appetite survey, published today, shows that with the exception of catastrophe exposure, growth appetite is strong across the marketplace.

Through November and December of last year, the broker’s Howden Markets unit surveyed 38 insurers, including 24 Lloyd’s Syndicates, four dual platforms markets, and 10 company markets, to gauge the underwriting appetite and rate landscape as the industry moves through 2022.

Overall, the responses from C-Suite members suggest a strong growth appetite across the London insurance and reinsurance market.

However, carriers did cite a strategy to temper catastrophe exposure, something which has been evident in re/insurers Q4 and full-year 2021 results.

According to Howden, the vast majority of insurers it surveyed noted a strategy of “reducing the degree and proportion” of catastrophe risk in their overall portfolios for the 2022 year of account.

In fact, only one insurer expressed a desire to grow the proportion of catastrophe risk in their portfolio, citing favourable market conditions for this line of business in 2022 on the back of expected rate increases in the hardening market.

2021 saw insurers and reinsurers assume catastrophe losses of more than $100 billion once again, with some estimates going as high as $140 billion. This, coupled with the impacts of climate change on secondary perils and “waning faith in the integrity of the catastrophe models,” according to Howden, is driving the pull-back.

While contraction from a business line at times of heightened volatility is certainly nothing new, the increased sophistication, understanding, and willingness of the insurance-linked securities (ILS) space could present an opportunity for some to maintain their cat risk portfolios.

Of course, the ILS sector is expanding into other areas, but catastrophe risk remains the dominant area of focus.

After all, ILS were created in the aftermath of Hurricane Andrew in the early 90s and has since grown from a niche to an integral part of how a growing number of insurers and reinsurers operate their business.

Over the years, the investor base has expanded significantly and, importantly, so too has their understanding of the exposures and their willingness to support the balance sheets of global carriers by investing in insurance and reinsurance-related risks.

Against this backdrop, it’s worth considering that while many cited a strategic desire to retreat from the cat risk arena, for those with the capability, it might be prudent to leverage alternative, or third-party reinsurance capital to help maintain portfolios of cat risk, rather than pulling back.

For those at Lloyd’s, the London Bridge Risk PCC ILS structure could be the answer, as this enables underwriters to leverage third-party investor capitalised quota-shares to maintain market share in catastrophe risks, while not over-extending their own balance-sheets or PML’s.

Utilising ILS capacity may not be appealing or necessary for all in the London market.

However, having access to efficient and diversifying sources of capital, especially at a time of heightened volatility, could help to maintain cat portfolios and importantly market share, at a time when rates are still trending upwards.