Swiss Re Insurance-Linked Fund Management

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Munich Re lifts Jebi industry loss to $13bn, some ILW’s potentially in play


Global reinsurance firm Munich Re has lifted its estimate for insurance industry losses from 2018’s Japanese typhoon Jebi to $13 billion, which we understand could put a handful of still-exposed industry loss trigger contracts such as ILW’s in play.

typhoon-jebi-ir-satelliteMunich Re provides estimates of insurance market losses for major catastrophe events through its NatCat catastrophe loss database service, which the reinsurance company provides to clients and more broadly to the industry.

Munich Re’s NatCat estimate for the industry loss from 2018’s typhoon Jebi in Japan sat at $9 billion, where it had originally been estimated as far back as Q1 2019.

But market sources began to tell us this had been raised just in recent days and Munich Re has now confirmed to us that its NatCat loss estimate for typhoon Jebi now stands some 44% higher, at US $13 billion.

That’s based on overall economic losses of around US $18.2 billion, according to the latest data from the reinsurance company.

It makes sense that the industry estimate would eventually rise, as other providers of catastrophe loss data were already much higher than the $9 billion.

In addition, Munich Re’s own loss estimate for typhoon Jebi had risen in Q2 of 2019, so it always seemed likely the NatCat estimate would rise eventually as well.

However, we’re told that there’s a chance some industry loss warranty (ILW) contracts may still be on-risk for further creeping of the Jebi industry loss estimate, which could put some in play depending on where their triggers sit.

Sources told us that there are likely still a handful of contracts that are outstanding, as their collateral is still trapped in case of further increases in Jebi’s loss, and we’re also told some of these may use the NatCat data for their trigger input sources.

Now, to clarify, Munich Re’s NatCat data is not an official data source for use in ILW triggers, but it is one that market participants have used for ILW’s unofficially over the years.

Munich Re doesn’t license the data for use as a third-party reporting source for industry loss triggers, but that’s never stopped the reinsurance, retrocession and ILS market from using any data source, where the parties involved in the transaction can agree to it.

As we’ve explained before, there are risks attached to using unofficial industry loss trigger sources, one of which now becomes apparent.

The fact that the industry loss estimate sat at $9 billion for well over a year, below the $10 billion point that is often selected as a trigger or attachment point for risk transfer contracts, but then rose 44% to $13 billion, shows that there can be a certain risk associated with the use of unofficial loss triggers.

An official provider would have delivered regular updates, at agreed or published reporting intervals, allowing parties in a risk transfer contract to hopefully see creep coming, rather than it all appearing at once.

That’s a moral hazard for those using an unofficial industry loss trigger though, as it’s not the responsibility of any unofficial source such as Munich Re, given its NatCat data is a research driven exercise to make catastrophe loss data available to clients and partners, not a service it ever intended to be used in this way.

We can’t be sure there are any ILW’s specifically at-risk of loss or paying out due to this increase in the NatCat estimate for Jebi, but it is possible.

There are still ILW’s trapped that continue to be exposed to any increases in the estimate for Jebi we understand, with some using NatCat data for the trigger. But we can’t say whether any are specifically exposed to the fact the estimate has risen past the $10 billion or $12.5 billion mark, both of which have been used as trigger points before for Japanese wind ILW’s, our sources said.

We also understand that there may be relevant industry loss or ILW contracts that have been commuted, as it had been assumed that the Jebi loss estimate was finalised by all sources, given the lack of movement in it this year.

Which shows another potential hazard of using an unofficial trigger data source. As, if the estimate suddenly rises after you’ve commuted your coverage, you are unlikely to be able to make any claim.

So, with the NatCat estimate for typhoon Jebi now at $13 billion, it brings this catastrophe loss data source into line with others in the marketplace.

Swiss Re’s sigma insured loss estimate for typhoon Jebi stands at $13.3 billion and appears to have risen to that amount in 2020, having been at close to $13 billion in late 2019. We’re not sure if that move threatened any additional ILW’s, as sigma data is also used unofficially for some ILW trades.

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