Despite extraordinary losses in 2020, the insurance-linked securities (ILS) and traditional reinsurance markets demonstrated their resilience at the January 2021 renewals, raising capital back to pre-pandemic levels, according to an A.M. Best report. The report, Insurance-Linked Securities Market Weathers Elevated Catastrophe Activity and Global Pandemic in 2020, finds that the global reinsurance capital returned to its pre-pandemic level of $485 billion at year-end 2020. The total comprises $88 billion of ILS capital and $397 billion of traditional reinsurance capital, according to estimates from A.M. Best and Guy Carpenter. It also reveals that the ILS market saw a record year in 2020 for catastrophe bond issuance, which A.M. Best says was driven predominantly by a glut of maturities and a host of new issuers. Given the level of scheduled maturities this year, A.M. Best suggests that cat bond issuance in 2021 could reach or eclipse 2020 levels. The rating firm explains that an ongoing issue in the ILS market is the amount of trapped capital due to actual and potential losses from natural catastrophe events before 2020 and the COVID-19 pandemic, along with pre-emptive trapping. The report finds that some cedents accommodated ILS funds by rolling over their collateral into new contracts, rather than trapping it in anticipation of further COVID-19-related loss developments, although A.M. Best notes that there is a risk that ceding companies could ask for the rolled-over collateral if losses emerge unfavourably. According to the report, the rollover accommodation by the cedents amounts to kicking the can down the road for COVID-19-related losses. A.M. Best says: “The coming months may continue to lead to either court cases or arbitration to settle how much, if any, capital can be trapped, based largely on COVID-19-related incurred but not reported reserves, especially for business interruption or event cancellation business.” The report also states that anticipated rate increases in the retrocession, reinsurance and ILS markets for the January 2021 renewal season did not materialise to expected levels due partially to the additional capacity brought to the markets. “This influx of fresh capital mitigated the potential hardening market and helped the reinsurance market operate in a relatively orderly manner during the renewals. Although the rate increases fell short of expectations in certain segments, they reversed the downward pricing trend of the past few years,” A.M. Best comments. The upcoming renewals in April and June of this year in regions that were affected more by natural catastrophe losses will shed more light on whether rate increases will continue, according to the rating firm.
