RMS launches European windstorm loss index

http://www.environmental-finance.com/
London, 21 February

Risk Management Solutions (RMS) has launched the first parametric index in Europe for assessing the insured losses from windstorms.

A parametric index is one that uses wind speeds to estimate losses, as opposed to usual loss estimation methods, which are based actual insurance claims. RMS said the new index will help the insurance industry make better estimates of losses from windstorms and help to structure products – such as catastrophe (cat) bonds, industry loss warranties (ILWs) and derivative contracts – that transfer risk from the insurance industry to the capital markets.

"As the market for insurance-linked securities has grown, the industry has been searching for loss indices to help structure deals," said Peter Nakada, managing director of RMS Consulting, a risk modeling firm based in California. "In the US, cat bonds and ILWs 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."

The Paradex Europe Windstorm index combines wind speed measurements in specific locations with industry exposure data and uses the modelled relationship between wind speed and damage to calculate insured loss estimates. The index covers residential, commercial, industrial and agricultural lines of business across Austria, Belgium, Denmark, France, Germany, Ireland, Luxembourg, the Netherlands, Norway, Sweden, Switzerland and the UK.

Albert Selius, New York-based managing director at Swiss Re, said: "Cat 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 index 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, RMS said.

Nakada said: "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." The first products using this index are expected to be announced later this year. "We are in contact right now with a number of people looking at using this," Nakada said. They were primarily looking to structure ILWs, but one cat bond is under development, he added.