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RMS Launches First Parametric Industry Loss Index for Europe Windstorm
Newark, CA –
February 14, 2008 – Risk Management Solutions (RMS) today
launched the first parametric index for assessing insured industry
losses from windstorms in Europe. Paradex Europe Windstorm combines wind
speed measurements in specific locations with industry exposure data,
and uses the modeled relationship between wind speed and damage to
calculate insured loss estimates. These estimates can be used by the
insurance industry and capital markets to structure and monitor
catastrophe bonds, industry loss warranties, and derivative contracts.
Both issuers and investors benefit from the simplicity and transparency
of a parametric index with the intuition of an industry loss index.
“As the market for insurance-linked securities has grown, the industry
has been searching for loss indices to help structure deals,” commented
Peter Nakada, managing director of RMS Consulting. “In the U.S.,
catastrophe bonds and industry loss warranties have been structured off
an index called the Property Claims Service, but until now there has
been no reliable and objective equivalent for windstorm risk in Europe.”
Paradex uses the RMS® Europe Windstorm Model and Industry Exposure
Database to analyze the impact of wind speeds on insured loss by
location, known as CRESTA* zone. Residential, commercial, industrial,
and agricultural lines of business are covered across Austria, Belgium,
Denmark, France, Germany, Ireland, Luxembourg, Netherlands, Norway,
Sweden, Switzerland, and the United Kingdom.
“The process for calculating industry losses is based
on impartial data, so there is no room for biasing calculations. Wind
speeds are obtained directly from European meteorological offices,
averaged by CRESTA zone and then mapped to an industry loss using simple
reference tables,” said Albert Essiam, manager of the Paradex division
of RMS. “These wind speed loss tables are available upfront to
investors, as well as insurers and reinsurers, providing a transparent
view of how the loss estimates are derived.” Indices
that involve polling the industry can take more than a year to settle as
insurers and reinsurers update their original loss estimates following a
windstorm. In contrast, Paradex Europe Windstorm provides an initial
loss estimate 10 business days after an event, and settles definitively
no more than 40 business days after. Because it is an objective standard
for trading windstorm risk, securities that are structured on the index
should become more liquid.
“Increased transparency, simplicity, and liquidity
for investors translate into better execution for issuers,” commented
Albert Selius, managing director at Swiss Re. He added: “Catastrophe
bonds can involve a vast amount of documentation about how the
parametric triggers will work. By embedding all the calculation
mechanics into an index, the documentation for each security becomes far
more straightforward, so the bond can get to market much quicker.”
“The beauty of this index is that an issuer can keep its basis risk down
by tailoring the index to match its portfolio by location and line of
business. Investors, on the other hand, get the benefit of a pure
windstorm bet, as recorded wind speeds are the only live input into the
calculation,” commented Peter Nakada. “We believe this index could be
the catalyst for a parametric revolution, where substantial amounts of
peak peril hazard risk will be transferred to the capital markets.”
*CRESTA (Catastrophe Risk Evaluation and
Standardizing Target Accumulations) is the global standard used by the
re/insurance industry for analyzing data. It divides countries into
zones and sub-zones to allow hazard exposure to be reported on a
recognized global basis.
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