RMS’s New Hurricane Damage Assessment Tool Aimed to Please Investors |
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Written by U. S. Insurance News
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Monday, 09 June 2008 |
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The next time a hurricane hits the United States, property insurers can
turn to a new tool from Risk Management Solutions (RMS) for help in
assessing the damage. The tool won’t be helpful just to property owners
after the storm, but also to insurance investors before the damage
occurs.
RMS recently released Paradex U.S. Hurricane, the first parametric index for assessing insured industry losses from U.S. hurricanes. The tool measures wind speeds at multiple locations; combined with proprietary industry exposure data, it provides updated, objective, and reliable insured loss estimates that the insurance industry and capital markets can use to structure catastrophe bonds, industry loss warranties, and derivative contracts.
“Historically, the main difficulty in transferring catastrophe risk to the capital markets has been meeting investors’ need for standardization, objectivity, and transparency while simultaneously providing issuers with indices tailored to their specific risks,” explained Peter Nakada, managing director of RMS Consulting. “Paradex U.S. Hurricane is unique in that it is transparent enough to please investors, flexible enough to minimize basis risk for issuers, and efficient enough to satisfy both parties’ desire for a rapid settlement.”
Indeed, the new hurricane index settles no later than 40 business days following the event.
The assessment tool offers industry loss estimates by region and line of business in nine identified hurricane-prone zones throughout Florida, the East Coast, and the Gulf Coast. When a hurricane strikes, wind speeds are obtained from a network of hurricane-hardened weather stations constructed by WeatherFlow, a provider of weather data. This data is then measured against RMS insurance industry exposure and vulnerability curves to calculate final index values.
"Objectivity and transparency are critically important and are what this index seems to offer investors,” said John Brynjolfsson, portfolio manager and managing director of PIMCO, a global asset management firm. “The risk is driven solely by wind speed, and this reduces the complexity of evaluating the attractiveness of investment opportunities based on it.”
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