This content is copyright to www.artemis.bm and should not appear anywhere else, or an infringement has occurred.

With a widening crisis protection gap evident around the world there is a need for a transformational expansion in the use of insurance and reinsurance mechanisms to transfer risks to the capital markets, according to a report from the High-Level Panel on Closing the Crisis Protection Gap.

The report calls for a tenfold increase in the proportion of international crisis finance that is pre-arranged by 2035.

Here, insurance and risk transfer are called out as examples of pre-arranged crisis financing that can serve to transfer financial risks away from public balance sheets, into the private and capital markets.

“In a world where risks can be modelled with ever greater precision, we should not wait to react until a crisis occurs,” explained Co-Chair of the High-Level Panel Sir Mark Lowcock, a former United Nations Under-Secretary-General for Humanitarian Affairs and Emergency Relief Coordinator. “Nor can millions of people in vulnerable communities be left dependent on underfunded, ad hoc financial appeals where more effective financing instruments exist.”

Out of the $76 billion spent on crisis finance in 2022, below 2% of this was prearranged, according to research by the Centre for Disaster Protection, while just 1.4% of that reached low-income countries.

Highlighting the scale of the gap that requires financing, the report explains that annual global economic losses from unmitigated climate change are projected to range between $7 trillion and $38 trillion by 2050.

As a result, “The High-Level Panel is calling for a transformation in the level of effort dedicated to transferring risks from public balance sheets to capital markets.”

“With human and economic costs already mounting, the world cannot afford to continue treating crises as unexpected surprises,” said Arunma Oteh, Co-Chair of the High-Level Panel and a former World Bank Vice President and Treasurer. “This is not just about the quantity but also the quality of finance which is being provided. Reactive funding is too slow, too costly, and leaves the world needlessly exposed. Prearranged finance must become the default for all predictable and modellable crises, not the exception.”

The High-Level Panel explains that it is, “unequivocal that all forms of insurance are central to this transformation.

“With projected crisis costs projected even conservatively in the trillions annually by 2050, capital markets hold relatively untapped potential for securing essential public assets like roads, hospitals, and power grids, and for transferring enormous financial risks away from public balance sheets.”

Adding that, “The High-Level Panel considers options for pre-arranged financing to be becoming more feasible and applicable due to recent technical advances in financial technology, risk transfer instruments, and risk modelling, but their use is not yet growing commensurately.”

The evolution of the insurance and reinsurance industry, including the development of insurance-linked securities (ILS) instruments such as catastrophe bonds, are seen as key for delivering the pre-arranged crisis financing that is required.

“The High-Level Panel considers options for pre-arranged financing to be becoming more feasible and applicable due to recent technical advances in financial technology, risk transfer instruments, and risk modelling, but their use is not yet growing commensurately,” the report explains.

Instruments such as catastrophe bonds, “provide governments with immediate liquidity in the wake of a disaster, enabling rapid response without destabilizing national economies.

“Much of this innovation is driven by parametric insurance, where payouts are triggered by specific data points (e.g., wind speed or rainfall levels), eliminating the delays of traditional claims processes.”

At the same time, indemnity structures are also evolving, while blended finance approaches are securing contingent financing for those exposed to crises such as climate risks.

“This growing sophistication is helping to support long-term community resilience, reduce economic and social disruptions caused by disasters, and build stronger frameworks for managing crises effectively,” the report states.

There’s a clear role for insurance-linked securities (ILS) mechanisms as a structure for transferring crisis related risks to the capital markets, while insurance and reinsurance product design and techniques can be leveraged with the help of private market participants as well.

Of course, none of this is new or groundbreaking and we’ve been calling for greater use of capital markets structures and infrastructure, alongside risk transfer technology, to close the still-widening insurance protection gap for over two decades now.

What’s needed are concerted efforts to put the onus on protection of lives, communities, livelihoods and economic activity for economic actors, with a focus on ensuring governments and corporations around the world take some greater level of responsibility for the financial exposure their respective constituents face due to crises.

The insurance, reinsurance and ILS industries are always available to help in delivering risk transfer solutions, but there needs to be buyers of protection and markets for risk.

These just don’t exist meaningfully currently, in the areas of the global economy where financial impacts of crises go uncovered. As there is no onus on those generating, deriving, or extracting economic value to account for these risks and put in place more meaningful protection of their constituents and dependents.

Transformational expansion of risk transfer to capital markets needed to finance future crises was published by: www.Artemis.bm
Our catastrophe bond deal directory
Sign up for our free weekly email newsletter here.

This content is copyright to www.artemis.bm and should not appear anywhere else, or an infringement has occurred.

Competitive pricing for industry-loss warranty (ILW) protection has driven “considerable interest from a growing demographic of buyers” at the January 1st 2025 reinsurance renewals, according to broker Howden Re.

Industry-loss warranty (ILW) market activity has continued to be strong, as had been seen through the hard cycle, the reinsurance broker explained in its new renewals report.

Buyers have been seeking out well-priced retrocessional protection, in addition to which we have also seen some strategic industry-loss trigger structured protection purchases from a number of primary carriers, seeing the ILW product as well-priced in derivative and securitized catastrophe bond forms.

ILW trade size, count and limit transacted have all been increasing, Howden Re explained, as increasing numbers of buyers (reinsurers and insurers) opt to integrate this industry-loss index triggered product into their wider purchasing strategies.

Howden Re estimates that the market for industry-loss warranties (ILW’s) grew by around 10% to US $7.7 billion in terms of limits transacted from 2023 into 2024.

“The highly responsive nature of the market has seen it successfully navigate a period of market-moving losses (including Hurricane Ian), historically high pricing, fluid supply and demand dynamics and, most recently, a forecasted hyperactive 2024 hurricane season that ultimately resulted in limited ILW losses,” Howden Re explained.

Despite some uncertainty over the direction of travel in loss estimates related to 2024’s major hurricanes Helene and Milton, buyer behaviour was relatively unchanged, given most ILW’s trigger at higher levels of industry loss, Howden Re continued.

Some of the broker’s clients are reviewing their purchasing strategies, being motivated by earnings protection.

All of this explains significant movements in the industry-loss warranty (ILW) market since 2022, as following a period of constrained capacity, low losses and a more positive capital supply environment sets the scene for reduced pricing, Howden Re believes.

The broker noted that US peak peril ILW’s incepting at January 1st 2025 have been trading at lower rates-on-line as a result, reflecting the price environment across reinsurance, retrocession and, of course, the catastrophe bond market.

“Such flexibility, combined with more competitive pricing relative to competing products – US peak peril ILWs incepting at 1 January 2025 showed 20-30% nominal rate reductions from the mid-year 2024 trading period and 5-10% nominal rate reductions from January 2024 – has sparked considerable interest from a growing demographic of buyers,” Howden Re stated.

These ILW price movements closely resemble what we have been hearing from our market contacts.

We’ve updated our industry-loss warranty (ILW) pricing data set using insights gathered over the last few weeks from a range of our market sources.

In the ILW pricing chart below (analyse an interactive version of here), the dotted-lines indicate projections for the forward-looking ILW rate environment.

Howden Re went on to explain that the ILW market is offering competitive pricing for a full-range of products, including aggregate covers, subsequent events, state- and county-weighted ILW’s, and multi-year contracts, all across a broad range of perils and geographies.

The reinsurance broker said, “2024 already stood out for increased trades in international ILW markets, predominantly for the perils of EU wind and flood (at a trigger level of ~US$10 billion). The market is also open to exploring the even more challenging issue of earnings protection from US severe convective storms, with client demand and executed transactions steadily increasing. Parametric solutions are also being explored, with limits likely to scale up rapidly with successful proofs of concept.”

Emphasising “flexibility” in the ILW market, Howden Re said that, “In addition to traditional retrocession purchasers (who are increasingly attracted by healthy supply, a broadening product suite and competitive pricing), interest from insurers is also growing as they become more confident in the management of basis risk.”

As a result, ILW market “Momentum persisted into 1 January 2025 renewals as strong demand and abundant supply drove high trading levels, portending well for further growth this year,” Howden Re concluded.

We hope you find our ILW pricing data useful, as another indicator of reinsurance and retrocession market appetite and rates-on-line.

Competitive ILW pricing drives considerable buyer interest at renewal: Howden Re was published by: www.Artemis.bm
Our catastrophe bond deal directory
Sign up for our free weekly email newsletter here.

This content is copyright to www.artemis.bm and should not appear anywhere else, or an infringement has occurred.

Last year, catastrophe data aggregator and industry loss estimate provider PERILS revealed an extension to its services, with a new methodology that combines its standard data methodology with that of CRESTA CLIX, which the firm’s CEO Christoph Oehy has said will simplify the process for risk transfer use-cases including catastrophe bonds and ILW’s.

Back in November, when announcing its first loss estimate for the Storm Boris related severe flooding experienced across parts of Central Europe in September 2024, PERILS also revealed this change to its methodology offerings.

That loss event estimate was the first where it combined its own methodology with that of CRESTA CLIX, another loss data service owned by PERILS.

The standard PERILS approach, now renamed PERILS CORE, involves collecting catastrophe event loss data from affected insurers which is then grossed up to 100% market level to be reported on.

The CRESTA CLIX methodology is different, being based on the expert evaluation of a wide range of insurance industry sources, but as a result it covers a much wider range of territories than PERILS CORE.

With the combination of the two under a new catastrophe loss reporting methodology named PERILS EXTENDED, the company can from offer loss estimates all over the world from January 1st 2025, except for the United States.

Having provided its last quarterly update yesterday, the CRESTA CLIX service has now become part of the PERILS product offering as PERILS EXTENDED, from January 1st 2025, complementing the existing and now called PERILS CORE service.

Christoph Oehy, CEO of PERILS, commented on the change, “In the past years, industry losses reported by CRESTA CLIX have been used as triggers in ILW transactions and in one Cat Bond, in addition to industry losses reported by PERILS.

“Moving forward, by having a single reporting agency this will greatly simplify this process for the risk transfer markets, which was a key consideration when we decided to combine the two reporting services under the PERILS umbrella.”

Matthias Saenger, Manager at CRESTA CLIX, added, “We are proud of what we have achieved with CRESTA CLIX since the service was launched in 2020. The database now contains industry loss information for more than 200 catastrophe events. The data has been regularly reviewed and updated, and is accessible in a clean and structured format, allowing underwriters and Cat researchers to focus on analytics rather than data cleansing.

“The CLIX team is looking forward to the launch of the PERILS EXTENDED service and we are convinced that the merger with PERILS CORE will benefit our users as it will provide single-source access to a comprehensive industry loss database.”

For PERILS, the combination with CRESTA CLIX means the company can provide a much broader range of catastrophe insurance market loss estimates, will have a larger and wider-reaching catastrophe loss database, and has greatly enhanced its territorial coverage for industry loss estimate provision.

As we had said before, we suspect the move will have been in part driven by market feedback, suggesting the industry wants access to more loss estimates with a methodology behind them, but is also perhaps more open to different types of loss estimate methodologies than might have been assumed.

We had also noted that, while this enhances the utility of the service and bring new loss estimates to risk transfer market participants, the new methodology may not always meet users needs given the introduction of expert evaluation into the mix, rather than a reported loss data approach.

As we’ve always said in our reporting, more data is naturally beneficial to those looking to structure and trade industry-loss triggered instruments, such as catastrophe bonds and industry-loss warrants (ILWs) and can open up new risk transfer opportunities where before they had not been feasible.

It will be interesting to see whether the new combined methodology from PERILS and CRESTA can drive greater use of these industry-loss index based risk transfer instruments over time.

PERILS with CRESTA CLIX to simplify reporting for cat bond & ILW risk transfer: CEO was published by: www.Artemis.bm
Our catastrophe bond deal directory
Sign up for our free weekly email newsletter here.