RMS Launches ‘Paradex’ Model for European Windstorms

Risk Management Solutions (RMS) announced the launch of “the first parametric index for assessing insured industry losses from windstorms in Europe.” The new model -” Paradex Europe Windstorm” – combines “wind speed measurements in specific locations with industry exposure data, and uses the modeled relationship between wind speed and damage to calculate insured loss estimates,” said the announcement. “These estimates can be used by the insurance industry and capital markets to structure and monitor catastrophe bonds, industry loss warranties, and derivative contracts. Both issuers and investors benefit from the simplicity and transparency of a parametric index with the intuition of an industry loss index.”

Peter Nakada, managing director of RMS Consulting, indicated that Paradex fills a need for a “reliable and objective equivalent for windstorm risk in Europe,” in line with the growth of the market for insurance-linked securities. He indicated that in the U.S. “catastrophe bonds and industry loss warranties have been structured off an index called the Property Claims Service,” but until now there hasn’t been an equivalent model for Europe.

RMS described Paradex as using its “Europe Windstorm Model and Industry Exposure Database to analyze the impact of wind speeds on insured loss by location, known as CRESTA zone. Residential, commercial, industrial, and agricultural lines of business are covered across Austria, Belgium, Denmark, France, Germany, Ireland, Luxembourg, Netherlands, Norway, Sweden, Switzerland, and the United Kingdom.”

Albert Essiam, manager of the Paradex division of RMS, noted that the system uses a process for calculating industry losses based on impartial data, “so there is no room for biasing calculations. Wind speeds are obtained directly from European meteorological offices, averaged by CRESTA zone and then mapped to an industry loss using simple reference tables. These wind speed loss tables are available up front to investors, as well as insurers and reinsurers, providing a transparent view of how the loss estimates are
derived.”

RMS’ new model can provide “an initial loss estimate 10 business days after an event, and settles definitively no more than 40 business days after.” According to RMS it now takes up to a year to calculate loss estimates by polling the numerous insurers and reinsurers who had coverage of the risks. As a result “trading windstorm risk, securities that are structured on the index should become more liquid,” using Paradex.

“Increased transparency, simplicity, and liquidity for investors translate into better execution for issuers,” commented Albert Selius, managing director at Swiss Re. He added: “Catastrophe bonds can involve a vast amount of documentation about how the parametric triggers will work. By embedding all the calculation mechanics into an index, the documentation for each security becomes far more straightforward, so the bond can get to market much quicker.”

“The beauty of this index is that an issuer can keep its basis risk down by tailoring the index to match its portfolio by location and line of business. Investors, on the other hand, get the benefit of a pure windstorm bet, as recorded wind speeds are the only live input into the calculation,” Nakada added. “We believe this index could be the catalyst for a parametric revolution, where substantial amounts of peak peril hazard risk will be transferred to the capital markets.”

Source: Risk management Solutions – www.rms.com