Global marine and energy: new access to original risk

The market has been crying out for original risk for years. Property-catastrophe risk was always supposed to be a first step for insurance-linked securities (ILS), not a destination. However, it’s looked more like the latter for some time.

The occasional efforts to get new risks into the ILS space, although successful, haven’t achieved scale. Creativity, client focus, and even sheer triumph of will can get a transaction completed, but they aren’t necessarily enough to make a new idea stick around long enough to become an old one.

For that to happen, the market needs to implement the appropriate infrastructure to support the absorption of new risks. If there were a common checklist to which we could all refer, industry-wide loss aggregation would be at the top. Now that the market has a solution for ocean marine and offshore energy, the time could be right for these risks to flow into the ILS market.

Frustrated demand

For several years, the ILS market has been clamouring for a global marine and energy loss index. Soft market conditions, increased competition for the traditional reinsurance market, and a need to deploy capital prudently constitute only part of the reason for the demand. In marine and energy, we found an additional problem: existing approaches to industry loss warranties (ILWs) simply weren’t working.

Some data sources frequently included in the laundry list of reporting agents in marine and energy ILWs were never designed to be used for that purpose. Others—such as news reports—don’t offer the needed level of reliability. In addition to considering the journalist’s source (and whether the journalist or source may have an agenda to advance), you run the risk that a relevant loss event wouldn’t even be newsworthy in an editor’s opinion, rendering the media ineffective as a source of backup data.

From there, it only gets worse. Occasionally, you’d see such language as ‘generally accepted London Market estimates’. This was once explained to me as being ‘a few marine underwriters scribbling numbers on the back of a cigarette pack at One Under Lime’.

Ultimately, it isn’t hard to see why some funds have limited their allocations to marine and energy ILWs—and why other players steer clear of the business entirely. The marine and energy ILW market has become quite small, despite the fact that there’s plenty of appetite for the risk. It was a clear case of the market needing the appropriate tools in order to digest and trade the risk effectively.

A single version of the truth

We launched PCS Global Marine and Energy this year to help the reinsurance and ILS community manage its risk and capital more effectively, with respect to these lines of business. With the support of a broad range of ILS and marine and energy market stakeholders, the PCS team has fully back-tested our methodology against 10 events going back to 2009 (see Table 1), and we’re in the process of exploring close to 20 more that may meet our criteria for inclusion and reporting.

PCS Global Marine and Energy provides industry loss estimates for ocean marine and offshore energy events likely to exceed $250 million on an industry-wide basis.Our first loss aggregation platform outside the property-catastrophe sector—and the first purpose-built global solution for the ILS market—PCS Global Marine and Energy provides industry loss estimates for ocean marine and offshore energy events likely to exceed $250 million on an industry-wide basis.

Insurers, reinsurers, and other stakeholders in the global risk and capital supply chain can gain access to an unbiased view of the industry loss for large non-elemental events around the world. Additionally, they can use the index to facilitate reinsurance and alternative risk transfer transactions, an area where the need for a loss aggregation service has been widely recognised.

By providing a loss aggregation approach that includes a rigorous methodology that includes data collection from both sides of the ILW trade, we’ve been able to get a full view of all activity in the market while simultaneously managing the risk of a single company having disproportionate influence over the estimate.

As a result, PCS is able to remain independent in a manner consistent with our role in property-catastrophe for the US, Canada, and Turkey. In doing so, the implementation of global loss aggregation for marine and energy should contribute to an increase in original risk from these lines entering the global reinsurance and ILS markets.

Table 1: PCS Global Marine and Energy loss events