New tools could give Europe a catastrophe trading market


Advances in risk modelling, measurement and management are all pointing towards the emergence of a much more fluid market for catastrophe instruments in Europe particularly with regards to windstorms (such as the recent windstorm Klaus). Right now there have been a few catastrophe bonds which have European windstorm exposure but no market comparable to the hurricane futures and options traded on the Chicago Mercantile Exchange (CME) or Insurance Futures Exchange (IFEX). New advancements in technology and cooperation between reinsurers could just pave the way for a future market to be set up.

Yesterday I mentioned the new PERILS AG initiative which aims to give Europe it’s own insurance loss index (similar to PCS), this can be used to set up triggers for catastrophe bonds and industry loss warranties or to base market pricing of futures and options on. It’s something Europe has never had, so it’s too early to say what impact it will have, however all the commentary on the subject hints at this being ready to utilise to help issue cat bonds by 2010. Europe has needed this transparency in data for some time and it’s great that PERILS aims to branch out into other hazards, flood is one which springs to mind and has market potential.

Another technology advancement which could help move Europe towards a commoditised risk market is the recent announcement of a new catastrophe model released by Weather Services International (WSI). WSI PreCat Forecast is a new risk management tool which predicts the total number and location of European windstorms for the upcoming season. I believe this is the first time that year round data has been so easily available to European reinsurers.

Combine advancements such as these with the increasing availability of risk modelling tools, with many companies beginning to opt to supply the software as a service (SaaS) model (for example the recent launch of Baseline Management Company Inc.) taking away the need for hefty upfront tech investments, and it’s possible we could see Europe leaping ahead of where it currently sits. At the very least we predict that this means we will see more catastrophe bonds issued in 2010 with a European windstorm focus, at the most we predict the emergence of traded European windstorm risk and other capital market instruments within two years.

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