Market loss index for Europe – Expanding capital market capacity
Swiss Re is advocating the establishment of an independent body to aggregate European claims data. The purpose of this body will be to provide the industry with a market loss index for catastrophic exposures. The industry-wide effort to achieve this goal will benefit all European insurers by facilitating the further expansion of the insurance-linked securities (ILS) market and improving the transparency of natural catastrophe claims data.
Current trends indicate that capital market investors will become an increasingly important source of capacity for the European insurance industry. According to recent studies, the frequency and intensity of European windstorms will rise, resulting in a growing demand for natural catastrophe capacity. Also, new regulatory and rating agency initiatives will increase capital and hedging requirements for catastrophic exposures, leading to a greater need for reinsurance or capital market solutions.
In Europe, the growth of the ILS and industry loss warranties (ILW) market has been hindered by the lack of an independent body to collect industry-wide data and establish a reliable and effective loss index. This contrasts with the US, where an independent market loss index already exists and provides a loss trigger for both ILS and ILW products. In 2006, the share of US cat bonds using this index as a trigger increased substantially; the same index has also enabled a significant rise in the ILW market for US exposures.
A market loss index will offer tangible benefits for European insurers that far outweigh the minimal effort required to report the data. The growth in the ILS and ILW markets will provide greater flexibility when purchasing natural catastrophe protection. In addition, the aggregated market loss data will help the industry improve its benchmarking, underwriting and exposure management for catastrophic events.
With this publication, Swiss Re aims to engage European insurers and help the industry bring about a practical and independent solution for establishing a market loss index for Europe.
