ILS funds free COVID trapped capital through commutations: AM Best

Insurance-linked securities (ILS) fund managers have been working to release trapped capital linked to possible COVID-related pandemic-related losses in European reinsurance contracts, with commutations underway, AM Best reported. .

In an extensive ILS market report from the ratings agency, one of the most interesting insights is that AM Best believes efforts to release capital trapped linked to possible pandemic losses remain a priority for managers. of ILS funds.

AM Best said that, overall, he believes the impact of the COVID-19 pandemic on the insurance-linked securities (ILS) market will remain limited.

“To date, paid loss ratios remain very low, and some market participants estimate that more than half of all COVID-related capital traps have been released,” the rating agency explained.

Adding that “However, the impact of the pandemic varied by ILS segment and region.”

Catastrophe bonds were not exposed, due to the widely named risks they cover. The same goes for industry loss warranties (ILW).

But, the collateral reinsurance segment has been hit harder and AM Best notes that it’s “especially in Europe, where COVID remains a significant issue.”

“Contract wording in Europe tended to be less specific than in the US, allowing for broader interpretation of coverage than expected. Arbitration cases and court decisions have generally favored insurers in the US more than in Europe,” continued AM Best.

Positively though, “the ILS managers are continuing the switch to release capital trapped due to COVID-19,” AM Best said.

“The high cost of arbitration and litigation can jeopardize relationships with ceding companies, prompting some ILS managers to pursue commutations instead,” the rating agency explained.

Adding that “these managers were able to take advantage of capacity constraints in the reinsurance market to negotiate switching terms to free up deployable capital.”

It is hoped that this will speed up the release of trapped capital linked to potential losses from the COVID-19 pandemic.

Some European catastrophe reinsurance programs remain a source of uncertainty for some ILS contracts, Artemis understands.

But we are told that even here the ILS market has some confidence that eventually a release of capital might be possible.

With market participants already feeling that more than half of COVID-trapped ILS capital has been released, we may see this pick up speed towards the end of the year as switch talks continue in line with negotiations of reinsurance renewal, which could be the next opportunity for ILS managers to make some more headway on this.

There has been a feeling in the ILS market that the level of capital trapped due to COVID-19 has been excessive, so it is encouraging to hear that this is still being worked on and in what appears to be a way positive and constructive for the market.

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