* Imminent U.S. hurricane season prompts more ILW trading
* High cat losses in Q1 leave companies without enough cover
* ILW prices increase by 10-15 percent
* Busy cat bond market leaves no free additional capacity
By Sarah Hills
LONDON, May 27 Catastrophe derivative prices and
trading have increased sharply in all U.S. natural peril risks
in the run-up to the start of the hurricane season, making it
more dfficult for reinsurance companies to hedge against a
repeat of Hurricane Katrina, brokers say.
Demand for industry-loss warranties (ILWs) and derivatives,
used by reinsurers such as Munich Re (MUVGn.DE), Swiss Re
RUKN.VX and Credit Suisse CSGN.VX to cover their losses from
natural disasters, remains brisk in the run-up to the six-month
long North Atlantic storm season, brokers said.
But a price decline in the ILW market in the last six months
has reversed as buyers look to protect themselves against
possible further catastrophe losses following the active first
and second quarters in 2010.
ILWs are reinsurance contracts, typically covering a
calendar year, that pay out according to the total loss to the
insurance industry of a hurricane or earthquake, rather than the
buyer's own losses. Similar derivatives are traded on an
exchange or over-the-counter.
"Events in Chile, Australia and offshore have impacted upon
(re)insurers' appetite to retain loss and so they are looking to
enhance those reinsurance protections already in place," said
Larry Rothstein, vice president, analytics and capital markets
for reinsurance brokerage Guy Carpenter's ILW Desk.
He said a sharp increase in traded volumes had resulted in
terms hardening by more than 10 percent after what has been a
sustained period of softening since early 2009.
Derivatives such as IFEX's Event-Linked Futures (ELF),
traded by the Chicago Climate Futures Exchange, have also
increased in price. An ELF, the capital markets equivalent of an
ILW, paying out on a $10 billion North America hurricane event
currently carries a premium of $46, compared with $39.25 in
(For more information see
Catastrophe losses were modest last year, after costly 2008
disasters such as Hurricanes Ike and Gustav, but this year has
seen a number of disasters, including the massive Gulf of Mexico
oil spill off the U.S. coast.
This could cause problems if there is a higher-than-normal
frequency of hurricanes, earthquakes and risk losses for the
remainder of the year, say brokers.
"Some companies have found themselves in a situation where
their protection has been partially eroded by events in the
first quarter of 2010. They need additional capacity to protect
against the wind season, so they may look to buy ILWs," said
Stefano Nicolini, senior vice president for broker (re)insurance
BMS's ILW team.
Demand for ILWs has increased prior to the June and July
renewals, particularly in U.S. wind, before the start of the
season. But brokers said pricing has increased by 10 to 15
percent in the last month due to a lack of capacity in the
The abundance of capacity in the traditional reinsurance
market -- particularly retrocession, the passing of reinsurance
risks to other reinsurers -- has contributed to a decrease in
demand for ILW as buyers can find suitable capacity in the
traditional market, brokers say.
"Retrocession capacity is tight for U.S. wind as there is
not much capacity available for U.S. wind nationwide covers,"
said Stephen Breen, a partner at boutique reinsurance broker
"Capacity is available when you get down to single state,
but that's not what people are asking for on retro covers -
their first choice is to buy nationwide," he said.
U.S. nationwide risks are seeing the highest increase in
pricing since the beginning of the year, but now there is no new
capacity coming in, added Nicolini.
"Suddenly there is less wind capacity in the ILW market, but
still demand and therefore pricing for wind is staying flat or
going up," he said.
Forecasters are predicting above average tropical storm
activity this year.
(Additional reporting by Daniel Fineren; Editing by David