PCS county-level estimates to enhance industry loss risk transfer

PCS has announced that it’s to deliver county-level resolutions for catastrophe events in the U.S. with insured losses of at least $1 billion, providing an enhanced level of granularity that contributes to lower basis risk in industry loss index trading.

The new offering (that we wrote about previously here) is available immediately, and also sees PCS, a Verisk Analytics business, retrospectively release county-level resolutions for Hurricanes Harvey, Irma, and Maria, alongside five other events from 2017 and 2018, following their next resurveys.

In the future, PCS says that it will provide county-level resolutions for loss events currently open for resurvey, as well as any future events that meet the $1 billion threshold.

Co-Head of PCS, Tom Johansmeyer, commented: “When I first began working with PCS, the market was quite vocal about the need for real county-level estimates in the United States, particularly for catastrophe-prone states like Texas and Florida. Since then, demand for such granularity has increased profoundly.

“At the same time, the catastrophe landscape has evolved. Large events aren’t limited to Gulf wind and California earthquake. Texas hail events now regularly exceed US$1 billion, and winter storms have also reached that threshold. That’s why PCS decided to take a national view of county level from the start. We sought to develop a solution that will meet the market’s needs for years to come—rather than merely focus on immediate concerns.”

According to PCS, insurance and reinsurance companies that operate in the U.S. have been looking for solutions for county-level resolution in industry-wide insured loss estimates in the country for a long time.

Perhaps most notably, the solutions desired by the industry relate to tropical storm events, but PCS notes that both severe convective and winter storms have shown they can have significant concentrations by country, with the $1 billion threshold being reached more frequently today than in the past for these types of loss events.

Ted Gregory, Co-Head of PCS, added: “Our collaboration partners within the industry are constantly in need of additional tools to assist with assessing and managing their risks. The PCS team is sensitive to these needs and has worked hard to bring this new process and product to fruition.”

PCS explains that for its county-level estimates for the U.S. it collects insurer expected ultimate loss and claim count estimates at the county level, which ensures delivery of an unprecedented level of granularity.

The firm leverages the same process for delivering its county-level loss estimates as it has for its state-level estimates since 1950, and, as opposed to modelling the estimates to reflect county-level losses, PCS’ estimates are based on the actual experience of insurers.

Following the announcement, Artemis spoke with Johansmeyer of PCS, who first explained why county-level might be useful for ceding companies.

“It depends on the ceding company of course. For some big retro programmes, we expect that there will continue to be a fair amount of trading at the state level rather than county, as the additional granularity may not be as necessary. And we don’t see this as a replacement for UNL cover at the primary level. Rather, if there are primary insurers who currently include ILWs as part of their risk and capital management strategies – particularly in Florida – then we believe this could help them reduce basis risk while still taking advantage of the benefits that ILWs offer. And for reinsurers with specific concentrations in catastrophe-prone states, we see the advantages of trading ILWs on a county basis.

“Also, let’s not forget that there are benefits aside from trading. Cedents and markets will be able to use this data to benchmark, model, and take action on a much more granular basis. With some states and risks, this could be quite useful. Many think immediately about tropical storm, but they should remember that we’ve seen fairly large and localised hail events, too,” said Johansmeyer.

He continued to provide some insight into how this might assist insurance-linked securities (ILS) funds and collateralized vehicles hedge their portfolios.

“The ILW angle comes to mind quickly, particularly as a replacement for what was once the CWIL market. We don’t expect this to get big quickly, though, as there could be price dynamics that make it difficult to put county-level triggers into practice. Our goal is to spend the next year or so helping the market understand our county-level estimates and integrate them into how they manage risk and capital. Of course, we do expect some risk-transfer to happen on this basis and will be there with our sleeves rolled up,” he said.

With this in mind, it could be that PCS’ county-level offering drives more ILW trading, continued Johansmeyer.

“County-level makes sense intuitively, especially in the basis risk discussion. However, some trades don’t contemplate a reduction in basis risk, which means the state level is fine. And we have yet to see how pricing would change for county-level ILWs relative to state. If cost makes sense relative to the reduction in basis risk, then we’d see county-level ILW trading really take off. But, if it becomes too expensive, then we expect to see county-level ILWs used more tactically. In general, the potential is there. It’ll take time to see how the market actually responds.”

Also read: PCS enhancing granularity with county-level loss data: Johansmeyer.