Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

RMS release first parametric industry loss index for hurricane risks


The market seems to be getting more sophisticated by the week as new tools come online to help cedents and deal managers get to grips with the risks they are trying to protect against. From the press release:

Risk Management Solutions have today announced the release of Paradex U.S. Hurricane, the first index for measuring industry losses from U.S. hurricanes. By combining actual wind speeds at multiple locations with proprietary industry exposure data, Paradex U.S. Hurricane provides timely, objective, and reliable insured loss estimates that can be used by the insurance industry and capital markets to structure catastrophe bonds, industry loss warranties, and derivative contracts.

Paradex U.S. Hurricane offers industry loss estimates by region and line of business in nine identified hurricane-prone zones throughout Florida, the East Coast, and the Gulf Coast.  In the event of a hurricane, wind speeds are obtained from a network of hurricane-hardened weather stations constructed by WeatherFlow, a leading provider of weather data. This data is then referenced against RMS insurance industry exposure and vulnerability curves to calculate final index values.

In contrast to loss indices that poll insurers and reinsurers and take many months to settle while initial estimates are updated, the Paradex U.S. Hurricane index settles no later than 40 business days following the event.

Advancements such as this will help to keep investors appetites for catastrophe bonds. Anything that can help to assess the risks and increase the transparency will help to encourage more investors into the market. This move by RMS will make the whole process of evaluating insurance-linked securities much less complex for prospective investors. I wonder whether RMS can apply such a parametric index to some of their other models such as hail, tornado or earthquake?

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