ILS is in for its sternest test from Dorian

Whoever thought it was a good idea to taunt the weather gods in this way? 

Only nine days ago hurricane statistic nerds were filling social media with posts saying that the 2019 North Atlantic storm season had just gone through the longest completely benign period since 1982. 

We hadn’t had a sniff of a disturbance between 15 July and 19 August. 

A quick check of the year when Ronald Reagan was halfway through his first term in the White House revealed only six storms and two very small US landfalls. 

We collectively sighed in relief. We’d take that. After 2017 and 2018, the industry needed a break, and so did we. 

But a week is a very long time, doubly so in August when the hurricane season hits its peak. 

The next day Tropical Storm Chantal formed. Then came Dorian. 

We kept an eye on him, but it didn’t look like he would be amounting to much – until a spectacular worsening of the prognosis in the last 36 hours. 

As I write we are staring down the double barrels of a Category 4 east Florida landfalling storm somewhere north of West Palm Beach, with the possibility of a quick traverse of the Panhandle and a second landfall on the Gulf Coast. There is potential for damage from a close brush with the Bahamas thrown in for good measure. 

Early industry canvassing is producing possible loss ranges as varied as $10bn-$20bn or $5bn-$30bn. It is perhaps telling that yesterday live cat markets weren’t quoting below triggers of $40bn.

The picture will change again, but one thing we know for certain we are going to get a hurricane landfall on the state of Florida for the third year in a row. 

Where exactly it lands is massively important for (re)insurers great work from modellers such as Karen Clark & Co has shown how this can change outcomes by many multiples. 

Adding to the massive uncertainty is the fact that Dorian will also hit a slightly different Florida than the one that greeted Irma and Michael. For this is a Florida with newly enacted assignment of benefits reforms, the positive effects of which are impossible to quantify because they are yet to be put to the test. 

But there is already one thing we know for certain. 

The ILS market is going to be tested like never before. A third consecutive year of losses is going to permanently separate the true believers from whatever is left of the more fair-weather investors. 

After some raised eyebrows arising from the 2017 experience, capital lock-ups are more conservative and longer-lived than they used to be. This brings a multiplier effect as ILS funds may have to reload yet again, even if losses are only projected to impact layers below their positions. 

This time whatever story the ILS market has to tell investors, many will not be taking its calls. Confidence will be tested to destruction and some will have had enough experience of loss creep to feel that none of their capital is properly safe until it is formally released.  

There is nothing like a shudder of fear to concentrate minds. 

Under such circumstances, retro can only get harder and that will affect all market dynamics. 

Just yesterday we were wondering out loud as to how long the positive industry pricing momentum would last if profits and serious excess capital returned quickly. 

Would underwriters keep the backbone they belatedly rediscovered in mid-year? 

Well, here comes the backbone in the shape of Dorian, whether we want him or not.