Weighted ILW’s in fashion as retro capacity pressures persist: Gallagher Re

As the retrocessional reinsurance marketplace remains capacity constricted, especially for lower down and catastrophe exposed attachments, the market has seen a resurgence in demand for weighted industry-loss warranty (ILW) products, according to Gallagher Re.

Weighted industry-loss warranties (ILW’s) will be very familiar to many in the insurance-linked securities (ILS) market, as well as in catastrophe bonds.

But, as an alternative to traditional reinsurance, the last time weighted ILW’s were really popular was back in 2010, when the County Weighted Industry Loss was developed by Guy Carpenter and leveraged capacity from Nephila Capital.

County-weighted ILW instruments have come in and out of favour since, but at the recently completed mid-year 2022 reinsurance renewals, broker Gallagher Re reports a bit of a resurgence as they came back into fashion as alternatives.

Both county-weighted and state-weighted ILW instruments are increasingly in fashion, used as complimentary products to support traditional UNL (ultimate net loss, or indemnity) capacity, given the capacity pressures in the non-marine retrocession space, Gallagher Re explained.

Weighted industry loss risk transfer instruments are a more calibrated version of a pure industry loss trigger instrument, as the coverage can be targeted by exposure and weighted to different regions.

That allows a carrier seeking either reinsurance or retrocession to buy coverage that is more closely aligned with their actual loss experience following a major event, without needing to buy a full indemnity protection.

At a time when traditional UNL retrocessional reinsurance has been harder to buy, due to the continued capacity issues in that market, the weighted ILW approach has become more appealing and come back into fashion somewhat.

Gallagher Re also reported that ILW’s have been seeing strong investor appetite, but that pricing pressures have been experienced, especially at lower attachment levels.

Overall, retrocession renewals were in the main more expensive at the mid-year renewals, with price increases ranging from +10% to +30%, sometimes more, for catastrophe loss hit buyers.

Gallagher Re also noted limited new capital entering the retro market at the renewals, which may also go some way to explaining the resurging attraction to weighted industry-loss based risk transfer instruments, as these have clearly seen strong investor appetite in the catastrophe bond market still.

Finally, there was also some index-trigger action in Florida, as Gallagher Re reported that, “Parametric solutions and county specific index triggers were widely used on placements, particularly to fill gaps at the lower end of programmes and behind captives.”

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