Ida adds to challenging year for aggregate retro

At current loss estimates Hurricane Ida is expected to lead to another disappointing year for aggregate retro writers and potential fatigue for ILS investors supporting the product, #ReinsuranceMonth panellists have said.

Following this year’s Winter Storm Uri and European floods – and an active 2020 for frequency of severity events – current industry loss estimates from modelling firms that range from $14bn to the RMS top end of $35bn ($31bn ex-National Flood Insurance Program) point to a further mid-sized hit for the sector.

And speaking on an ILS panel for The Insurer’s #ReinsuranceMonth yesterday, Pillar Capital Management CEO and chief investment officer Stephen Velotti said aggregate retro is in line for “another tough year”.

“Between the European floods and the winter storm, which took most people by surprise, most of the retentions were already eroded. Ida is a medium-sized event if it’s in the $20bn to $30bn range, and aggregate retro will have another poor year, with investors getting a bit of fatigue in that area,” he said.

Commenting on the same panel, TigerRisk Capital Markets & Advisory’s global head of ILS and capital solutions Philipp Kusche said the storm could attach some aggregate covers and leave them potentially on risk for the rest of the year.

“That brings the topic of collateral trapping back on the agenda, which will certainly be closely reviewed as we go through the next few months,” he suggested.

The panel broadly noted that the impact on the ILS market will differ depending on the product and the construction of each portfolio.

Modest cat bond impact

The cat bond impact overall is expected to be modest, with relatively high-attaching layers – although regional issuances that have specific Gulf of Mexico exposure will likely be triggered.

Aon Securities CEO Paul Schultz said the cat bond sector – with several deals currently being marketed – will see capacity and pricing continue in line with trends established earlier this year.

Velotti added that occurrence retro could see some impact on lower layers depending on the concentration of the underlying portfolio.

Kusche also noted that Ida will eat away at the modelled average annual loss investors would have started the year at.

“We certainly expect impacts, but it will depend on whether it’s more of a lower layer portfolio or also what the commercial and residential split is,” he commented.

Cost of goods sold

Axis ILS global head Chris Caponigro said investors shouldn’t be surprised by events like Ida and that the key for the industry is to price correctly for the risk, “to get it right in terms of cost of goods sold”.

He also said that underwriters will likely be factoring in recency as they look to achieve the right price for risk.

“This increased level of loss activity in the year to date will be a constant reminder to every underwriter with a pen out there that more premium is needed to cover the cost of goods sold. Underwriters have a recency bias … it’s one of the tools in their reach to ensure they’re getting paid appropriately,” he said.

Schultz called on the market to “not overreact”, with Ida an earnings event and not a capital event, and a large supply of capital in the market.

He added that his firm expects fresh inflows of capital depending on where Ida hits on the expected loss curve.