Swiss Re focus report: a European loss index based on industry-wide data is key to developing catastrophe bonds and expanding capital market capacity

22 January 2007, Zurich

In a focus report published today, Swiss Re advocates the establishment of an independent agency to aggregate European claims data and provide the insurance industry with an efficient market loss index for natural catastrophe risks. This industry-wide effort will facilitate the further expansion of the insurance-linked securities (ILS) market in Europe and improve the transparency of natural catastrophe claims data.

Current industry trends indicate that the European insurance industry will benefit from greater access to capital market solutions to cover natural catastrophe risks.

Globally, the insurance-linked securities market has grown significantly in recent years. 2006 was a record year with the issuance of catastrophe bonds increasing by 130%, bringing the total outstanding catastrophe bonds to USD 8.1 billion. An important recent development was the widespread use of market loss indexes as bond loss triggers for US risks. In addition, the market for industry loss warranties (ILW) has grown significantly for US natural catastrophe exposures and currently totals in excess of USD 4 billion.

In Europe, the growth of the ILS and ILW markets remains constrained due to the lack of an independent agency to collect industry-wide data and establish a reliable and effective market loss index.

“Industry loss indexes are key to unlocking additional capital market capacity for European insurers. With industry-wide support, this initiative can expand the traditional reinsurance and capital market solutions available to European insurers.” said Philip Lotz Chief Executive Officer of Capital Management and Advisory at Swiss Re.

In addition to the advantages of more robust European ILS and ILW markets, reliable market loss data will benefit the industry by improving benchmarking, underwriting and exposure management.

With its new publication, Swiss Re aims to engage a dialogue within the European insurance industry and help bring about a practical and independent solution for establishing an European market loss index.

Notes to editors

Insurance-linked securities (ILS)

ILS are bonds issued by an insurance or reinsurance company or corporation and purchased by institutional investors. The payment of interest and/or principal of the bond depends on the occurrence or severity of an insurance-related event defined under specific trigger conditions. The underlying risk of the bond is a peak or volume insurance risk. The best known form of ILS are catastrophe bonds (cat bonds).

Cat bond loss triggers

Cat bonds can be structured on a variety of loss triggers, including scientific parameters (eg earthquake magnitude), market loss indexes, modelled losses or the actual indemnity paid by an insurance company. In recent years, market loss indexes have been the most popular form of cat bond triggers in the US.

Industry loss warranties (ILW)

Industry loss warranties are index-based hedging instruments designed to protect insurers or reinsurers from severe loss events, mainly natural catastrophes. The buyer receives a claims payout if the market index loss exceeds specified thresholds post event.

Swiss Re

Swiss Re is the world’s leading and most diversified global reinsurer. The company operates through offices in over 30 countries. Founded in Zurich, Switzerland, in 1863, Swiss Re offers financial services products that enable risk-taking essential to enterprise and progress. The company’s traditional reinsurance products and related services for property and casualty, as well as the life and health business are complemented by insurance-based corporate finance solutions and supplementary services for comprehensive risk management. Swiss Re is rated “AA-“ by Standard & Poor’s, “Aa2” by Moody’s and “A+” by A.M. Best.