Trapped ILS capital after Ian could shrink European reinsurance: Munich Re’s Blunck

Speaking this morning at a briefing held in advance of the annual Baden-Baden reinsurance meetings in Germany, Thomas Blunck, member of the board of management at Munich Re, explained that trapped ILS capital after hurricane Ian could influence reinsurance renewals across the European region.

After hurricane Ian, there is an expectation for significant amounts of insurance-linked securities (ILS) market capital to be trapped, especially from collateralised reinsurance an retrocession arrangements.

The upshot of this will be less capacity available from the ILS fund market going into 2023, it is thought, which has ramifications for the availability of reinsurance and retro, which could be a particular issue coming at a time of global volatility when reinsurance capacity in general has been dented, for the traditional carriers as well.

Discussing the backdrop to the next set of reinsurance renewals at January 1st 2023, which are particularly important in Europe, Blunck explained that capacity could be an issue.

“The rise of the interest rate level, of course, is having an impact on the solvency of our industry. The bond values in our assets are going down and that might have an impact, depending on how you manage the duration, an impact on the solvency available in the balance sheet.

“AM Best does assess that the traditional reinsurance capital available this year may shrink by more or less 8%, which is quite a number if you imagine that on the other hand, the need for reinsurance and retrocession is rather increasing, driven by the inflation and driven by the rising exposure in certain segments,” Blunck explained.

Moving on to add the impacts of hurricane Ian, Blunck highlighted how trapped capital from the ILS market could affect European reinsurance clients.

“This is already the case before hurricane Ian. Now that hurricane Ian has hit Florida, one has also take into account that the trapped capital that needs to be available to pay the claims of Ian losses, and that may mean that also in Europe, we have a bit less capital available for the exposures here as an industry,” he said.

In addition he highlighted that exposures in cyber and natural disaster are also rising, with inflation exacerbating that.

On Munich Re and how it can respond to assist in provision of reinsurance capacity, Blunck highlighted that the company has the capacity to support its clients, but that terms and conditions will be critical in defining its appetite for deploying any more capital at the renewals.

“Munich Re is in a very strong financial position, our solvency ratio grew to 250% in Q2 and that allows us of course, to use the capacity and we want to deploy it in the prevailing market circumstances.

“But again, terms and conditions need to reflect what we’re seeing and this is not new. It’s not a new message. It’s something we repeat every year, but this year, it might be a bit more challenging,” Blunck continued.

Going into more detail to say, “Of course we will prioritise adding more capacity, according to the terms and conditions and the key topic on the terms and conditions is definitely pricing.

“So reflecting the rising exposures and certain segments, reflecting the right loss developments, that is decisive. And in some areas, we have some wordings topics that we want to address where we want to find common ground and clarity,” Blunck later said.

He went on to explain that one of the wordings areas Munich Re may look into at the renewals is again the issue of cyber risk, as well as in natural catastrophes the wording of loss occurrence terms.

All of which is set to make for a more challenging and harder reinsurance renewal for Europe, you would imagine, where capacity being limited will affect the outcome perhaps more significantly than seen in recent years.

Trapped ILS capital will affect availability of reinsurance and retrocession, while the availability of retrocession can also affect the ability of reinsurers to offer as much capacity as well, which alongside the asset-side impacts to balance-sheets, losses from catastrophes and the reduced appetite being seen for nat cat risk, could make catastrophe reinsurance a far more expensive and tightly termed purchase at 1/1 2023.