ILW market activity rising, as preparations for hurricane season begin

According to Artemis’ sources, activity in the industry-loss warranty (ILW) market has increased in the last few weeks, as reinsurance and insurance-linked securities (ILS) markets prepare for what is anticipated to be an active 2024 Atlantic hurricane season.

As we’ve reported, long-range seasonal forecasts for Atlantic hurricanes have suggested a challenging storm season could be ahead.

As we said, one forecaster called for a “hurricane season from hell” in 2024, while another is seen as particularly aggressive in calling for a large number of storms.

As we also reported from the SIFMA ILS event last week, forecaster Phil Klotzbach, Ph.D., from the Department of Atmospheric Science of the Colorado State University, said that the odds of La Niña are “pretty elevated” while conditions suggest we might not necessarily see as much re-curvature of storms as we did last year.

Forecasts are now concentrating minds on what could be ahead this hurricane season, with the Atlantic also at record warmth in the main development region, where storms form and fuel themselves.

With all that going on, it makes sense those holding portfolios of US coastal hurricane exposure would be preparing themselves and their portfolios for what could be a busy year of watching the tropics.

At the SIFMA ILS event in Miami last week, the subject of industry-loss warranties (ILW) and hedging preparations for hurricane season came up with a number of our contacts at ILS managers and investors in the sector.

All said that activity in ILW’s had picked up in just the last few weeks, while we also met some active buyers for the instruments.

It seems with a busy hurricane season forecast, the main route to hedging the portfolios of ILS investments continues to be the ILW, with some discussing the county-weighted industry-loss triggered instruments as well.

There was also discussion of industry-index products being constructed to more accurately reflect peak exposures in catastrophe bond portfolios, as tools for hedging against US wind exposure.

One source told us that ILW pricing has remained under-pressure through recent weeks, recall that Artemis’ data on industry loss warranty (ILW) price trends was already signalling this would occur during the last quarter of 2023.

Managers of portfolios of ILS instruments, reinsurance and retrocession with significant coastal wind exposure in the United States are keenly focused on ensuring their peaks are managed and concentration risk is controlled, we are told.

All of which makes perfect sense, in a year where such high hurricane numbers are being forecast currently.

We are also told that interest in ILW’s for hedging is being shown in some quarters of the London market as well, where retrocession needs have remained less sufficient than in previous years.

While the retro market was far more balanced at the January renewals, not everyone managed to secure the hedging capacity they needed and some were waiting to see how Atlantic conditions developed.

For those with capacity to deploy in support of industry-loss based reinsurance and retro, now might also be a good time to deploy it, as the forecasts may also assist in holding rates up a little more and some are suggesting that the softening in ILW triggered instruments that we’ve seen in catastrophe bonds of late may be slowing or even halting at this time.

We are told that capacity remains in ample supply for ILW’s and industry-loss index triggered instruments, albeit becoming more selective than it was around the January renewals.

Of course, there’s still a long way to go until the hurricane season peak and with more season hurricane forecasts due out over the next few weeks, it will be interesting to see if the activity levels in trading instruments such as ILW’s can further increase.