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Xactanalysis Insights and PCS

PCS suggest expanding reinsurance capital markets with wildfire


Expanding the remit of the reinsurance and capital markets convergence arena seems to be high on the list of priorities for Property Claim Services (PCS) at the moment. The latest area of expansion it believes it can help to facilitate is transferring wildfire risks to capital market investors.

PCS, a division of Verisk and the leading source of data on insured property losses from catastrophes in the U.S. and Canada, is actively working ona number of new initiatives at the moment. As we wrote recently, PCS is looking at opportunities to expand its catastrophe data services internationally and has also been looking at the marine & energy space as a new line of business it could report on.

PCS provides insured loss data and statistics on natural catastrophe events in the United States and Canada at the moment. Whenever PCS believes that a catastrophe event in the covered area might result in an insurance industry loss above $25m it assigns a catastrophe series number and tracks losses as they are reported by market insurers.

The end result is that PCS data services are widely used across the reinsurance and insurance-linked securities markets, particularly in catastrophe bonds and industry loss triggered reinsurance or derivative contracts. PCS reporting features as the arbiter of whether a trigger event has occurred in many reinsurance contracts, industry loss warranties (ILWs) and catastrophe bond transactions.

In a blog post published yesterday, PCS suggests that there is another peril that it could help to bring to the capital markets, U.S. wildfire. PCS said that its own database contains data on 23 catastrophe loss events which contain the ‘wildland fire’ peril since 1949. PCS has identified more than $8 billion in catastrophe losses that include wildland fire, with more than $5 billion occurring during the last ten years.

PCS suggests that this data could be used to create triggers for industry-loss based reinsurance contracts or instruments such as wildfire catastrophe bonds and wildfire industry-loss warranties (ILW’s). As an example it said that its data could be used to construct an ILW contract which triggers when a PCS catastrophe bulletin contains a $500m loss and includes the wildland fire peril designation.

Delving further into this, PCS reports losses by U.S. state, meaning that it could be possible to constructs an ILW covering California wildfires, Nevada wildfires or another state specific protection. Thinking about the current wildfire season, which has seen many fires raging and acres burned across western U.S. states, this type of protection could be extremely useful for a homeowners insurer with coverage in the region or a reinsurer with significant exposure in wildfire prone states.

It’s a very interesting suggestion from PCS and shows the firms intent to broaden its scope and as a result help to broaden the alternative reinsurance and ILS markets remit. This would be welcomed by both sponsors and investors alike, with sponsors keen to ensure protection is matched to the losses the industry experiences and investors always keen for new perils and opportunities for diversification.

There is a lot of scope for PCS to broaden its remit, if it chooses and as a result help to expand the alternative reinsurance and ILS markets. Geographical expansion, new lines of business such as energy risk and bringing new opportunities to the fore, such as wildfire, will all be welcomed by the broader reinsurance market and ILS or alternative capital players alike.

Another possible area for expansion which may be welcomed by the market at a time when the reinsurance sector is increasing its focus on it is crop insurance losses. Crop losses for the last few years have been rising due to drought and the market would certainly benefit from improved reporting and the chance to create crop industry-loss products. This would also suit a number of capital markets players who have begun to deploy capital into or assess crop as a new peril to diversify into.

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