An example would be if an insurer has exposure to hurricanes in Florida, they could buy an industry loss warranty exposed to wind in that region of the U.S. which would be triggered if the total industry insured loss rose above $10 billion. They pay a premium to the company who writes this cover for them (often a reinsurer or hedge fund) and in return could receive the limit amount if losses exceed the pre-defined amount.
Often written as a reinsurance contract an industry loss warranty can sometimes have additional clauses which must be met for a payout to be made, such as additionally to the industry loss the buyer must also have experienced a specified amount of loss themselves.
There arer different types of industry loss warranties available. Live Cat industry loss warranty contracts are traded while an event is occuring, often while a storm approaches landfall. Dead Cat industry loss warranties can be bought and traded on an event which has already happened but where the final loss amount is not yet known. Back-up Covers can be arranged after an event has occurred to provide protection against follow-on events which certain catastrophes can cause (such as flooding or fire following an event).
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