RMS Undertakes Risk Analysis for First Securitization Covering Electrical Transmission and Distribution Risk

Risk Management Solutions (RMS), a provider of products and services for the management of catastrophe risk, recently performed the risk analysis for the Pylon Ltd securitization covering damage from windstorm for a major European electricity supplier. The innovative securitization is the first for a European corporate and the first such deal worldwide to cover transmission and distribution (T&D) risk.

Utility companies across the globe have exposure to windstorm catastrophe loss through damage to T&D networks and property. In December 1999, damages from Windstorms Lothar and Martin in France caused substantial damage to the electricity supply network, affecting more than three million customers in France. Similarly the storm in October 1987 caused substantial damage to the T&D networks in the U.K.and France.

RMS created a parametric index for the Pylon Ltd transaction. The index is based on recorded windspeeds, and is weighted to match the regional variations in vulnerability to wind-related damage for the protected network. A multi-year risk analysis to quantify the probability of loss was performed using the proprietary stochastic database in the RMS Europe Windstorm Model.

“Pylon Ltd represents an important new milestone in the development of the alternative risk transfer market,” said Dr. Robert Muir-Wood, chief risk officer at RMS. “Index-based catastrophe risk securitization is now offering a truly competitive risk transfer solution for lines of business that have had difficulty in obtaining conventional insurance coverages. Windstorm-related power outages are a major concern to utility companies in many regions, as highlighted by the six million U.S. customers without power following Hurricane Isabel in September 2003.”