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ILWs on watch as Harvey losses rise

PCS has increased its loss number for Hurricane Harvey to $17.1bn from $15.7bn, according to Trading Risk sources.

This has taken the loss tally for aggregate industry loss warranties (ILWs) covering US perils to $38.7bn for hurricanes Irma and Harvey as well as the Tubbs wildfire.

This includes PCS' most recent $14.2bn US-related Irma figure and its $7.7bn tally for the Californian wildfire.

Aggregate ILWs typically only cover US states and therefore exclude offshore territories such as Puerto Rico and the US Virgin Islands, both of which were affected by Irma.

The $38.7bn total is closing in on the $40bn trigger level that would activate a small volume of aggregate ILWs, sources said.

But the majority of the ILW market is made up of aggregate deals which will only trigger if US combined losses exceed $50bn.

However, as Harvey and Irma losses have been revised up in recent months, there is a possibility that some buyers of niche "window ILW" products could lose out on a claim linked to Harvey or Irma on a per-event basis.

A window ILW features a narrowly defined trigger that only offers cover for losses within a certain range. If the loss surpasses the upper boundary, then the buyer receives no payout.

Typical trigger ranges for window ILWs have been put at $5bn-$15bn, $10bn-$25bn and $3bn-$10bn.

The increases to the Irma and Harvey estimates followed an initial reduction PCS made in December to its Irma loss number.

This benefited one public ILW strategy, a fund offered by City National Rochdale.

The fund took a 3.9 percent loss in the six months to 31 January, which was much reduced from an initial 31 percent devaluation recognised in the three months to October after the fund initially wrote off multiple Irma-exposed contracts.

PCS was approached for comment. However, as the firm had not seen source material obtained by Trading Risk, assistant vice president Tom Johansmeyer said: "We refuse to comment on misappropriated intellectual property."

 

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