We all know it’s there. Some industry participants whisper about it, and a few have actually seen it. I’m talking about the industry loss warranty (ILW) market. This opaque corner of the reinsurance industry provides a lot of capital flexibility, but improper execution can result in high unexpected costs later. No one has addressed many of the pitfalls — and opportunities — associated with ILW execution, largely because the participants in this market value discretion.
To a certain degree, that needs to change.
While it would be virtually impossible — and likely of little value to anyone — to pry open the ILW “black box,” the participants in some ILW transactions could benefit from an appropriate amount of light — enough for the parties to get a better sense of an ILW structure’s implications without revealing confidential information. Without a bit of transparency, between the commitment to privacy and a zeal for keeping frictional costs to a minimum, the parties to some ILWs may be putting themselves at risk.
Property Claim Services® (PCS®), a division of Verisk Insurance Solutions, is committed to helping ILW market participants without compromising the discretion on which they have come to rely. For ILW issuers choosing the PCS Catastrophe Loss Index, we’re fully committed to an active relationship that includes:
- explanation of the PCS methodology including how it applies to particular catastrophes (such as Sandy)
- insights into specific catastrophe events and losses
- use of PCS materials to settle disputes (for example, in arbitration)
- guarantee that the parties to the ILW will receive all PCS catastrophe bulletins from the only authorized and reliable source for the documents
- ensuring that the parties to the ILW understand what is included — and specifically excluded — from PCS catastrophe loss estimates
The ILW market does not have to change to become a more effective risk transfer environment. Rather, it needs to take full advantage of the resources available to it — including those from PCS. We’re ready to help issuers understand our industry loss index and use it more effectively to help prevent gaps from emerging in ILW cover.