Insurance Linked Security (ILS) triggers have long included indices based upon industry surveys and loss estimations. In the US the PCS (Property Claim Services) has become the industry benchmark for many Industry Loss Warranty (ILW) and some index traded insurance products. Outside the US, Swiss Re’s Sigma publication has been the recognised index. However, these loss notification media were not designed for this purpose.

There is a new toy in the ILS toyshop.

As the ILS market has rapidly expanded over the past decade, a number of, predominantly European, (re)insurers acting under the auspices of the Chief Risk Officers’ Forum have been investigating the development of a bespoke European loss index. Yesterday Perils AG was announced. Perils’ founding shareholders, who hold equal shares in the firm, include Allianz, AXA, Groupama, Guy Carpenter, Munich Re, PartnerRe, Swiss Re, and Zurich. The company will be fully operational in the latter part of this year, and will offer two main products ‘to subscribers’, which are likely to include insurers, reinsurers, brokers, risk modellers, banks and other insurance industry stakeholders.

These two products are:

1. Aggregated industry-wide insurance exposure data (insured values), which will be catalogued by risk type and CRESTA zones (defined European geographical zones for natural catastrophe insurance). The data will be provided on an annual basis;

2. Industry loss estimates per risk type and CRESTA zones, following large natural catastrophe events.”

The development of this index will remove any perceived ‘moral hazard’ from Swiss Re. Swiss Re have been actively engaged in the ILS space, facilitating trades, buying/selling ILWs, and so forth. By removing the reliance upon a Sigma trigger will ease the reporting burden on Swiss Re, and increase the transparency around the index itself.

 This initiative is to be welcomed and will have some beneficial impacts upon the European insurance industry. But will it be industry-changing? The timing of the release of this product, given the current economic backdrop, will make it challenging for ILS providers to test the water with this index—as this has not been tested in a real cat scenario.

There are associated issues of basis risk given that the index will be based upon a large set of extrapolated exposure/inventory and loss date. The quality will be driven by the information provided by respondents to the questionnaire issued by Perils. The big question remains as to how forthcoming, and timely, this information will be. Improving data quality and maintaining the integrity of the underlying databases will be a significant challenge, and an ongoing issue – as the catastrophe modelling agencies have already found.

I look forward to seeing how this index develops, how widely it will be used (given that this is on a subscription basis rather than ‘free’), and whether it will indeed help to revive the ILS space in Europe this year.

Tags: ILS, ILW, Reinsurance, Swiss Re

This entry was posted by Vinay Mistry on Wednesday, February 18th, 2009 at 2:52 pm and is filed under Exposure Management.