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Democratising parametric modelling


Democratising parametric modelling

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None of the catastrophe bond deals completed so far in 2016 has incorporated parametric triggers. Enter a new tool, Cat-in-a-Box, which provides a means to verify the figures presented with minimal expertise, as Jinal Shah, director, capital markets at RMS, explains.

Parametric triggers hold the potential to create a mini-revolution in catastrophe reinsurance, but their use to date has been limited. The appropriate modelling tools are few, and they rest in the hands of only a small group of brokers and specialists. Very few buyers, investors, underwriters, and intermediaries have easy access. However, the black box has now been opened, lifting the lid off these inexpensive and completely transparent risk contracts.

Most conventional reinsurance contracts are indemnity-based. They pay out when actual losses in the cedant’s portfolio reach a specified level, which can take years. Other contracts, such as insurance-linked securities (ILS) instruments including industry loss warranties (ILWs) and some catastrophe bonds, are triggered when a third-party estimate of total industry losses from the reinsured event reaches a specified threshold.

But industry losses are difficult to predict with accuracy: initial loss estimates from the April 2016 Kumamoto earthquake varied between $1.7 billion and $3.5 billion. Actual claims will take months or even years to develop. Much more information will have to be gathered, and damage assessed, before it is clear whether some industry loss contracts have been triggered.

Dynamic causal modelling, Parametric

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