RMS Announces New Parametric Loss Index for Japan Quake Risks

May 19, 2010

Risk Management Solutions announced the addition of Japan earthquake to its existing suite of parametric industry loss indices covering U.S. hurricane, U.S. earthquake, and Europe windstorm.

RMS said: “Paradex Japan Earthquake – the first parametric index for this peril region – combines ground shaking data from U.S. Geological Survey (USGS) ShakeMaps with industry exposure data to calculate insured loss estimates. It can be used to structure and monitor catastrophe bonds, industry loss warranties, and derivative contracts.

“The index provides estimates by city code and line of business for all 47 prefectures in Japan and incorporates damage from ground shaking and related fire, enabling issuers to customize the index to match their exposures and minimize the risk of a security failing to fully cover their event losses.”

Peter Nakada, managing director of RMS RiskMarkets, explained: “Japan is in one of the most seismically active areas of the world, and the high concentrations of insured property exposure in metropolitan Tokyo sit perilously close to the three major tectonic plate boundaries.

“There is no definitive authority providing industry loss estimates for catastrophe events in Japan, so Paradex is designed to fill this gap. Insurers and reinsurers now have a clear-cut way of transferring earthquake risk, which was previously only available through complex cat bonds.”

RMS also pointed out that “catastrophe risk can be transferred quickly and transparently to the capital markets using the index, with contracts settling in 40 business days or fewer following an event, giving insurers and reinsurers quicker access to the capital needed to pay claims.

“The advantage for investors is that they do not need a comprehensive understanding of the insurance claims process to assess the attractiveness of an investment structured using Paradex, since securities are based purely on the earthquake hazard.

“Recent catastrophe bonds structured using Paradex include Atlas VI sponsored by SCOR and Eos Re sponsored by Munich Re, both of which cover Europe windstorm risk.”

Source: Risk Management Solutions

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