Busy cat year offers a silver lining
An extremely active year for European windstorms in 2013 had a silver lining for the re/insurance industry in that it meant valuable data could be collected—something that will substantially improve the industry’s ability to model, price and insure such risks in the future.
That is the view of Luzi Hitz, chief executive of PERILS, the Zurich-based company formed to improve the collection and availability of catastrophe insurance market data. The “conveyor belt” of storms that swept through Europe last year causing insured losses in excess of €3.5 billion offered the company the opportunity to capture a variety of valuable and previously unavailable data.
If a storm looks likely to cause more than €200 million in insured losses, PERILS initiates its loss-capturing procedures. Last year, four storms fell into this category: Christian, Xaver, Dirk and Tini. For these storms, PERILS obtained loss data from Europe’s insurers and analysed this against meteorological factors such as wind speed. They also combined it with information available on the total sums insured (TSI) in different areas.
“We were able to collect a vast array of data points as a result of this analysis at a very granular level. We were able to dig right down and produce results by area code and by CRESTA zones. This information is invaluable to the industry. Before PERILS, the only players collecting this were some of the big reinsurers and they really only made it available on a global basis,” Hitz said.
He said the ability to plot losses against wind speed for very specific geographical areas is extremely useful for the risk modelling firms in particular. “The quality of data such as this represents a crucial component of every model,” he said. “They use it to calibrate their models, making them more realistic and accurate. It was simply not available before so it gives the industry a lot more certainty around the risks they are covering and what they are charging.”
Georg Andrea, head of data management at PERILS, said that another consequence of this better-quality data being available has been a rapid increase in the use of instruments such as industry loss warranties (ILWs) and insurance-linked securities (ILS) that transfer European catastrophe risk into the capital markets.
PERILS acts as the reporting agent on such deals, usually structured using an industry loss-based trigger. The growth of this form of risk transfer in Europe is illustrated by the capacity at risk of the deals annually where PERILS acts as the reporting agent.
In 2010, the capacity at risk through 144A ILS deals was $227 million; through ILWs and other private deals it was $448 million. By 2013, these figures had increased to $2.5 billion on the ILS side and $1.9 billion in the form of private deals. So far in 2014, the equivalent figures are $2.83 billion in ILS and $1 billion in private deals.
Conversely, Andrea expects the portion of this form of risk transfer made up by private placements to shrink in 2014 as the use of 144A ILS deals becomes more common. The two methods of risk transfer effectively compete with each other in this space, he said.
“This is not necessarily an indication that business is being moved away from traditional reinsurance because much of this business takes the form of retrocessional coverage,” Andrea said. “But the growth of this market does illustrate how the provision of data from an independent body such as PERILS has helped facilitate the tradability of catastrophe risk in Europe.
“Prior to our establishment, capital markets investors would not accept such information from reinsurers—they felt there was a moral hazard. So our formation has benefited many in the industry and, although 2013 was a very bad year for storms with large losses, there is now a silver lining to that in that we have collected some very valuable data and we can ensure the industry has a much better handle on the potential risks going forward.”
