RMS on Sandy loss estimate, Paradex estimate and catastrophe bonds at risk

Risk modelling firm Risk Management Solutions (RMS) held a webinar to update customers and the media on their industry loss estimate for hurricane Sandy, the Paradex modelled-loss estimate and also the potential impact to any exposed catastrophe bonds. RMS had already told clients a few weeks ago that they expected Sandy would result in an insurance industry loss of between $20 billion and $25 billion. Today’s webinar showed that their estimates have not changed.

As well as discussing the RMS loss estimate, today’s webinar also looked at Sandy’s impact on the catastrophe bond and insurance-linked securities (ILS) market, saw RMS announce their Paradex index value for the storm, discussed the differences between different sources of loss data and gave RMS’ viewpoint on the drivers of modelled versus non-modelled losses.

RMS said that they were sticking with an insurance industry-loss estimate of between $20 billion and $25 billion, which they originally announced on the 14th November. They gave some more insight into how those figures break down, explaining that a $25 billion industry loss estimate was made up of $16 billion of commercial losses, $8 billion of residential losses and $750m of losses attributed to auto damage. Those numbers can be further broken down, with residential losses made up of $7 billion of wind losses and $1 billion of surge, RMS noted that the wind losses are largely driven by tree-fall damage rather than direct wind damage. The commercial losses are broken down into $14 billion of surge losses and $2 billion of wind.

How RMS breakdown their Sandy industry loss estimate

The industry loss estimate from RMS exclude losses from the National Flood Insurance Programme, public buildings, infrastructure such as the Mass Transit Authority (MTA), contingent business interruption and watercraft. This is interesting as contingent business interruption losses could be large and insured losses in the boating and marine sector are widely expected to reach $2 billion or more.

RMS provided some insight on the total property losses, including some of these elements that are not accounted for within their industry loss estimate. RMS put total property damages caused by Sandy at $55 billion, which they broke down to $33 billion commercial and $22 billion residential with $12 billion of those residential losses going to the NFIP.

RMS also discussed the return periods that their industry loss estimate equates to. The $20 billion to $25 billion range equates to a 70 to 90 year return period, using the long-term range. Using a medium term range the return period drops to 55 to 80 years for their estimate.

RMS also provided their Paradex index value loss estimate, which is a modelled view of losses from a catastrophe event. The Paradex value was first published on the 21st November, just 20 business days after the event. Paradex is supposed to settle within 40 days so for such a complex storm RMS did extremely well to produce a final settlement figure so rapidly. The Paradex index values can be used as a trigger within reinsurance and catastrophe bond transactions, in a similar way to a PCS industry loss estimate. In this case, had any outstanding cat bonds, ILWs or other instruments been structured with a Paradex trigger they would already have been fully settled. RMS stressed that this is a completely objective, modelled approach to obtaining an industry loss figure which can be used within an ILS or other structure.

RMS went on to discuss the potential for Sandy to impact any outstanding cat bonds. Assuming that losses are distributed precisely at the mean of the industry loss estimate, RMS said that an industry loss of $24 billion they see two exposed cat bonds suffering a loss of principal. They provided a useful illustration showing where they view the at-risk cat bonds for a $24 billion and $16 billion industry loss, including their view of expected losses as well. This shows the two most at-risk cat bonds as Swiss Re’s Successor Class V – F4 bonds and Swiss Re’s Globecat Ltd., both cat bonds that we highlighted before as at risk here.

RMS' view of catastrophe bonds at risk from hurricane Sandy

It should be noted that the graphic above from RMS’ presentation does not contain every single cat bond which has been considered at risk from hurricane Sandy. We listed more of the potentially at risk bonds here. It should also be noted that the above graphic represents RMS’ view of the at-risk cat bonds and even at a $24 billion industry loss it is by no means certain that the two cat bonds shown most at-risk would suffer losses, they simply look most at-risk according to RMS’ analysis.

Comparing their loss estimate, Paradex modelled-loss estimate and the $11 billion estimate issued by Property Claims Services (PCS), RMS said that it is not unheard of for a PCS estimate to double over time. They said that PCS estimates; often miss XS claims and specialty lines of business, can be understated due to zip-code level exposure data and also that PCS are generally more conservative on larger storms.

RMS said that they do not currently intend to update their industry loss estimate range, unless significant new information emerges which they feel would warrant revisiting it.