An update to the CRESTA zone standard, which is widely used in insurance, reinsurance, insurance-linked securities and catastrophe bonds to define geographic areas, may mean a change to loss reporting for some cat bonds.
The CRESTA (Catastrophe Risk Evaluation and Standardizing Target Accumulations) zone standard has been in use in the reinsurance market since it was created by an independent body in 1977, with the goal of establishing a uniform, global system that allows re/insurance industry participants to transfer data and present risk information based on a geographic zoning system.
The CRESTA zone specification was updated on the 13th May 2013, launching new worldwide zones which differ to the original CRESTA zones to some degree. The majority of the difference between the old and new CRESTA standard is related to nomenclature, while there has also been some changes to increase resolution which allows for more granular analysis to be performed.
PERILS AG, the Zurich-based provider of industry-wide European catastrophe insurance exposure, industry loss data and indices, uses the CRESTA zone standard extensively in its database and industry loss reporting for European catastrophe events. As a result the changed CRESTA zones have been factored into PERILS workflow and reporting process.
PERILS communicated the change to its reporting procedures to clients on the 20th March 2014 and the new process came into effect as of the 1st April this year. This may impact the loss reporting for any PERILS-based trigger supported catastrophe bonds, industry loss warranties (ILWs) or other industry loss based reinsurance transaction.
PERILS notified its clients of the following:
- From April 1, 2014, PERILS will report industry loss data using the newly revised CRESTA Zones.
- For any qualifying events occurring between April 1, 2014 to March 31, 2015, PERILS will report industry loss data using both the revised CRESTA Zones and the original CRESTA Zones, thus allowing clients to see both the before and after change reports.
- From April 1, 2015, PERILS will only provide industry loss data using the newly revised CRESTA Zones.
PERILS told Artemis this morning that it would also continue to report using both the old and new CRESTA zone standards on any outstanding catastrophe bonds using CRESTA zones that mature beyond April 2015. We believe there are only two such cat bonds in the market right now.
Any basis risk, between original modelled loss calculated using the old CRESTA zones and eventual reported loss based on the new CRESTA standard, will be minimal however as the changes to European CRESTA zones are largely related to the naming conventions used.
PERILS told Artemis that of the European regions it covers the majority only faced changes to nomenclature. However, Denmark has changed from 11 CRESTA zones to 85, bringing it into line with higher-resolution areas that use the first two digits of the postcode to define zones. The new CRESTA zones in Denmark can all be mapped back to the old ones. Also in France, Corsica has been split into two CRESTA zones, instead of the one zone it occupied before.
The CRESTA zone standard changes and resulting change to PERILS, as well as any other models or agencies using CRESTA zones, reporting and analysis will not impact sponsors or investors negatively.
PERILS is making life easier for its clients and users by double-reporting using the old and new standards until the last bond using the old standard has expired. This removes the need for clients to do this work themselves.
Going forward the new CRESTA zone standard will enhance the granularity at which PERILS can report its industry loss data for the zones which have had more than a nomenclature change. For the other zones it is purely a case of changing naming conventions.