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The industry loss warranty market will grow by as much as 25% in 2012, according to a report released Tuesday by Willis Group Holdings P.L.C.'s Willis Re unit.
“In 2012, the industry loss warranty market is expected to be back at peaks in trading volume and pricing last seen in the hard market of 2006-2007, post-Katrina, Rita and Wilma,” London-based Willis Re said in the report, “Q1 2012 ILW Update.”
ILWs are private reinsurance or derivative transactions triggered by an index of the total industry loss arising from a natural catastrophe. Willis Re estimates that the ILW market reached trading volumes of $6 billion last year.
“And, following a theme that we have tracked over the past year(s), the ILW market continues to shift toward the capital markets as the dominant protection providers,” Willis Re said in the report.
The report said about 75% of the estimated $6.5 billion to $7.5 billion capacity traded in 2012 “will come from capital markets players–including those that use a fronting reinsurer to support a collateralized cover.”
Henry Kingham, executive director of Willis Re Specialty and co-author of the report, said in a statement that he expects pricing in 2012 to be about 20% above that of 2011. “We saw significant pricing volatility on contracts at (Jan. 1),” said Mr. Kingham.
He said this was caused by record natural losses in 2011, changes in catastrophe models and shifts in capacity.
Mr. Kingham said “it is difficult to distinguish” between the impact of catastrophe modeler Risk Management Solutions Inc.'s Version 11 U.S. wind model and the wider impact of last year's catastrophe losses on ILW buying demand and capacity supply.
He noted, however, that loss-affected contracts in general experienced price increases in the 30% to 50% range in January, while non-loss-affected contracts experienced increases in the 10% to 20% range.