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Original Risk: A Society for Change Agents

Cat-in-a-Box & parametric contract pricing app launched by RMS


Risk modelling firm RMS has launched a new cloud-based application that enables all insurance, reinsurance or insurance-linked securities (ILS) markets to model, create and price parametric risk transfer cat-in-a-box contracts.

Cat-in-a-boxThe RMS Cat-in-a Box app is designed to provide a simple, quick and graphical approach to make the underwriting of parametric catastrophe risk contracts easier and extend the ability to design and price these structures to the entire reinsurance and ILS market.

The app appears focused on hurricane risk at the moment, but we’d imagine RMS will have plans to expand it to cover other risks and perils if it is widely adopted.

RMS explains that cat-in-a-box structures have long provided a solution for corporates to gain catastrophe or weather risk transfer cover for a specified area, for events of a specified severity or magnitude. Use-cases include providing quick and effective insurance protection for installations such as offshore energy platforms, but parametric insurance contracts are much more widely used today for corporates seeking weather risk protection.

RMS hopes to help the growth of parametric covers to increase, bringing the ability to price and structure these contracts to a much wider group, with the ILS market being a key target as the modeller says that previously; “A simple, consistent, and transparent methodology to model these transactions has been unavailable to the ILS community.”

Stephen Moss, director, capital markets at RMS, explained; “The new RMS Cat-in-a Box app makes modeling parametric risk dramatically more straightforward, opening up the opportunity for many more companies to transfer risk on this basis. Not only can users easily define the geographic areas in question, calculating the likelihood of different sized catastrophes is made simple, including the key peril-regions such as hurricane risk in the Gulf of Mexico and North America earthquake.”

Parametric insurance, reinsurance or ILS contracts are triggered by the parameters of a catastrophe or weather event, such as location, intensity or severity, factors such as wind-speed or ground motion, rather than amount of losses caused by an event.

This enables a rapid decision to be made, on whether a contract has been triggered or not, resulting in a fast claims payment when it’s most needed. This makes parametric structures suitable as a source of business interruption coverage, for corporates exposed to severe catastrophe or weather events.

“With the numerous benefits provided by parametric structures combined with the ability to now better assess the risk using the new RMS Cat-in-a Box app, we fully expect the supply of parametric deals to increase as we approach the start of the 2016 hurricane season,” Moss continued.

The RMS Cat-in-a Box app is available as part of the RMS Miu Insights web platform. Users can adjust the geographic area and change parameters associated with the hazard, in order to produce instant key risk metrics and Exceedance Probability (EP) curves which can be used to structure and price parametric box contracts.

This is another example of an insurance technology (insurtech) innovation that will enable insurance-linked securities (ILS) managers and capital markets investors to get closer to the source of risk. By structuring and backing parametric contracts for corporates, ILS investors can bring their risk capital directly to the cedent, avoiding the reinsurance renewal cycle and shortening the value-chain.

The app might also provide a useful pricing starting point for catastrophe bonds and other parametric insurance contracts, at least providing some much-needed transparency and efficiency in the structuring and issuance process.

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