The Florida reinsurance renewal is still a few months away, but it’s already becoming a hot topic. A flurry of industry loss warranty (ILW) issuance activity is likely this month as carriers line up their reinsurance programs for hurricane season. As you prepare, keep the following in mind about your ILW triggers:
1. Align your perils and your index: An industry loss index — such as the PCS® Catastrophe Loss Index — can include losses from a wide range of perils, including tornado, hail, and earthquake. Also, PCS covers man-made catastrophes — not just natural catastrophes — in North America. Consequently, using the whole industrywide loss for an ILW that covers only certain perils could lead to unexpected additional exposure. You can customize the ILW and the components of the index that you use to align with each other. If you’re securing cover for a single peril (such as wind), think about whether the underlying policies are exposed to another peril (such as severe weather or tornado). And be mindful of the risk of concurrent events.
2. Get granular: Some ILWs focus on a narrow geographic region but still trigger on the overall PCS loss estimate. This practice introduces unnecessary basis risk. PCS publishes industrywide loss estimates state by state (as well as statewide estimates for losses and claim counts by line of business). Such granular estimates can help ILW issuers align their cover more closely with their exposure. Instead of writing a Florida-only wind-exposed ILW that triggers on an overall loss of $25 billion, for example, the carrier could use a Florida loss of $15 billion (or even a Florida property loss of $8 billion). With such a trigger, possibly disproportionate losses in other states would not slant the results. For even more granularity, issuers can use county-weighted triggers with PCS data as the input.
3. Remember what’s in (and what’s out): The PCS methodology specifically omits certain losses, including marine/offshore energy, reinsurance, self-insurance, and flood (with certain exceptions). For a fuller view, download the most recent PCS catastrophe bond market update.
4. Think past the issuance process: If your ILW actually does trigger, you’ll likely want a fast and accurate settlement, and PCS can help you through the process. That starts with our supplying a copy of all relevant catastrophe bulletins for reference by the parties or for use in dispute resolution. Because the bulletins come directly from PCS, everyone involved will have data known to be authentic. Also, the parties involved may have the opportunity to engage PCS to discuss the methodology for estimating losses, as well as other factors that could help in the settlement process.
5. You can ask questions: When you license PCS data for your ILW transactions, you get access to the PCS team. We’re committed to protecting the privacy of the carriers reporting their loss estimates to us, but we can help you understand our process — and its implications for your transaction.