Howden Re Outlook at 1.1 insurance loss warranties (ILW)

The 2024 ILW market has performed strongly through the hard cycle, with trade size and count and limit transacted increasing as more buyers (reinsurers and insurers) integrate the product into their wider purchasing strategies.

The highly responsive nature of the market (which grew by ~10% from 2023 to 2024 to reach approximately US$7.7 billion in limit) has seen it successfully navigate a period of market-moving losses (including Hurricane Ian), historically high pricing, fluid supply and demand dynamics and, most recently, a forecasted hyperactive 2024 hurricane season that ultimately played out with limited ILW losses.

For all the uncertainty around loss development for Hurricanes Helene and Milton and steep adjustments to initial estimates from an index provider, buying behaviours were relatively unchanged given that most ILWs provide capital protection, which is triggered at significantly higher levels of loss. Some clients motivated by earnings protections are reviewing their purchasing strategies.

This backdrop explains significant market movements since 2022, said James Cooney, Managing Director, Howden Re.

After a period of constrained capacity, low losses (aided by favourable development from Hurricane Ian) and a more positive supply environment at year-end 2024 (with core markets prepared to increase deployments) sets the scene heading into this year for reduced pricing and an offering that utilises the full suite of products (e.g. aggregate covers, subsequent events, state- and county-weighted ILW instruments, multi-year contracts) across a broad range of perils and geographies.

2024 already stood out for increased trades in international ILW markets, predominantly for the perils of EU wind and flood (at trigger levels of US$10 billion and above).

“The market is also open to exploring the even more challenging issue of earnings protection from US severe convective storms, with client demand and executed transactions steadily increasing,” Cooney said.

Parametric solutions are also being explored, with limits likely to scale up rapidly with successful proofs of concept.

Such flexibility, combined with more competitive pricing relative to competing products – US peak peril ILWs incepting at 1 January 2025 showed 20-30% nominal rate reductions from the mid-year 2024 trading period and 5-10% nominal rate reductions from January 2024 – has sparked considerable interest from a growing demographic of buyers.

“In addition to traditional retrocession purchasers (who are increasingly attracted by healthy supply, a broadening product suite and competitive pricing), interest from insurers is also growing as they become more confident in the management of basis risk,” said James Troughton, Managing Director, Global Specialty Treaty and ILW Practice Lead, Howden Re.

Momentum persisted into 1 January 2025 renewals as strong demand and abundant supply drove high trading levels, portending well for further growth this year.