PCS working on parametric-style terrorism ILW trigger for ILS

by Artemis on January 14, 2016

As the global threat of terror attacks remains heightened following a series of high-profile events in 2015, PCS has been working closely with sister company Verisk Maplecroft to establish a parametric-style trigger for terror ILWs, the firm said.

According to Verisk Maplecroft’s recently published 2016 Political Risk Outlook report, 7,750 conventional terrorism acts took place in 2015, with many of the same groups and drivers of terror events expected to remain, and even intensify during the coming year, underlining the growing need for terrorism risk protection.

ILWs for terror events do exist and have become somewhat more common during the current soft insurance, reinsurance, and insurance-linked securities (ILS) market environment, with reinsurers accepting terror risk as part of their overall property catastrophe business to bulk out their programme and make the costs as efficient as possible.

That has made terrorism retrocesssional reinsurance increasingly important to some companies, as they look to ensure they are protected for any major events which cause significant property damages or losses.

“And it’s become somewhat common for them subsequently to lay of the global terror risk to be left with, essentially, the book of business they wanted,” explains PCS.

The issue however, explains PCS, is that the types of ILWs currently used for terror cover can be extremely challenging to manage, with as many as 15 reporting agents in certain cases. Furthermore, some events aren’t independent adds PCS, all of which can lead to cedents and markets “accepting a certain amount of trigger risk beyond the basis risk they would ordinarily assume.”

Assistant Vice President, Reinsurance Services, Verisk Insurance Solutions, Tom Johansmeyer said; “When I look at how terror ILWs are triggered now – with up to 15 reporting agents – I can only think that there has to be a better way.

“The need for a single, cohesive, and consistent trigger for global terror ILWs has become incredibly important. Consistent event definition and trigger construction can improve both transparency and analysis, improving risk and capital management decision-making worldwide.”

In light of this, PCS, which like Verisk Maplecroft and Verisk Insurance Solutions is a Verisk Analytics unit, is exploring the use of a parametric-style trigger structure for terror ILWs, which would utilize current parameters from Verisk Maplecroft’s event reports to trigger the transaction.

Such parameters could include, “event type (bombing, arson/firebombing, damage to property, nuclear/biological/ chemical/radiological attack), sectors (government, energy, industrials, financials, telecoms), weapon type (vehicle bomb, mortar/artillery, rocket-propelled grenade, firearms), and fatalities (using a range or minimum threshold),” explains PCS.

The data available to PCS from its sister company Verisk Maplecroft’s global terrorism database and the Verisk Maplecroft Terrorism Risk Index (TRI), which assesses the sub-national-level risk of terrorism on a normalised 0-10 scale down to 1 km2 worldwide, is comprehensive and dates back to 2004.

In 2015 alone the firm highlights a staggering 7,657 acts of terrorism or political violence across 81 different countries, and this doesn’t include kidnap or ransom incidents.

In fact, the firm states that the Verisk Maplecroft database includes more than 130,000 terror incidents since 2004, and is updated on a day-to-day basis, “offering reinsurers the most up to date picture of the risk landscape, while simultaneously facilitating long-term pattern analyses,” advised Daniel Gray, Terrorism & Security analyst at Verisk Maplecroft.

Furthermore, explains Gray; “To provide users with an unrivalled level of insight, each terrorist incident is precisely geo-tagged and includes verified data and information covering 30 separate parameters, including the weapon type, casualty counts and facility damages. This data informs Verisk Maplecroft’s monthly Terrorism Risk Index, which enables clients in the insurance sector to benchmark their exposures to terrorism down to 1 km2 worldwide.”

The development and use of a terror ILW structured with a parametric trigger, “could help reinsurers and ILS funds hedge the global terror risk they may assume as part of larger property catastrophe programs,” adds PCS.

As the world and its businesses become ever more connected through the evolution to a truly digital world, the impacts of terror events are far-reaching and can have serous impacts to business operations, as well as the obvious tragedy and panic they create for societies.

At the same time the ILS market is constantly looking to grow and expand its reach, something that requires new risks, new geographies, and innovative structures to be achieved.

So it’s likely that ILS players would be eager to access terror risks in a more meaningful way, providing the risk was understood and the price was sufficient, something a parametric-style trigger would help to achieve, along with Verisk Maplecroft’s extensive database and its TRI.

PCS offers an example of a global terror ILW, stating that such a structure, using “Verisk Maplecroft event data could cover all events excluding kidnapping, unlawful killing, torture, theft, wounding, and forced disappearance with at least 20 fatalities and excluding fake devices, letter bombs, toxic attacks, and psychiatric medicine.

“Further, one could specify an event duration of a certain number of days (30, for example) based on the Verisk Maplecroft event bulletin. If an event meeting those criteria were to occur, the instrument would pay the cedent.”

“We’ve already received a number of client inquiries about the Verisk Maplecroft-driven trigger approach and look forward to helping the market solve this important problem,” concluded Johansmeyer.

It’s an interesting concept and one that could be used as a trigger in other contracts than ILW style derivative type structures. Across the reinsurance market significant uncertainty exists as to terror exposures and as this world becomes increasingly threatened the demand for risk transfer and coverage will likely increase.

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Retired_Analyst January 18, 2016 at 1:01 pm

Very interesting, but tell me does it include fires?

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