Risk Management Solutions (RMS) have issued a preliminary index value from their Paradex Japan earthquake index for the 11th March Tohoku earthquake. The Paradex index is used in two of the catastrophe bond transactions with exposure to the Japanese earthquake, Montana Re and Atlas VI Capital.
The preliminary guidance from RMS indicates a Paradex index value of JP¥3.1 trillion (around $38 billion) for the main earthquake. RMS will release a final index value within 40 days of the first major fore-shock of this earthquake event which occurred on the 9th March. They anticipate further changes if the USGS updates its ShakeMaps and as aftershocks continue to occur.
RMS points out that the Paradex index values do not constitute a formal estimate of the insured loss from this event, they expect to issue an insured loss estimate shortly. Rather, the Paradex index is used as a mechanism by which parametric risk transfer products can be measured and triggered.
Here’s some detail on the Paradex index and the methodology used to arrive at the index value for those not familiar with it:
Paradex Japan Earthquake is a pre-compiled index approximating modeled insured losses in Japan from shake and fire following. The index values are calculated by applying USGS ShakeMap hazard data to a representation of RMS’ modeled insured exposure in Japan, through an objective set of pre-determined index definitions.
The modeled lines of business included in the index values are commercial, residential, industrial facilities and Zenkyoren (National Mutual Insurance Federation of Agricultural Cooperatives).
Paradex index values do not include additional sources of loss not directly captured by the RMS Japan Earthquake Model, such as tsunami, loss amplification, and contingent business interruption. RMS industry loss estimates are informed by rigorous post-event surveys, and take into account these additional drivers of loss as well as detailed analysis of actual property damage in individual cities from the event. Detailed reconnaissance is likely to show a lower extent of damage than the application of USGS ShakeMaps to pre-compiled modeled exposures currently indicates. The actual damage at distances further from the main shock – particularly in metropolitan Tokyo, which has high property exposure – is expected to be lower than suggested by the precompiled vulnerability relationships used to derive the index.
RMS will continue to collect detailed damage data as the impacts of the event unfold to provide a more informed and complete view of the industry losses.
Whether that index value is sufficiently high to worry either of the exposed catastrophe bond deals which use Paradex is still unknown. The ceding insurers, Flagstone Re in the case of Montana Re and SCOR in the case of Atlas Capital VI, will be able to make preliminary assessments now they have the initial estimated index value from RMS. A final assessment won’t be made until the final index value is available.
You can access more information about Paradex Japan Earthquake on the RMS website here.