Reinsuring for Catastrophes Through Industry Loss Warranties - A Practical Approach

Within the last couple of decades natural and man-made catastrophes have become a source of increasing concern for the insurance industry. Industry Loss Warranties (ILWs) are reinsurance products whose payout is triggered by catastrophic insured loss. There is a growing market for ILWs because they provide a viable alternative to traditional reinsurance and catastrophe bonds for mitigating losses from such events. This growing market requires a consistent and sound way of pricing ILWs. The process is made simpler because pricing ILWs does not require knowledge of individual chlient's exposures but only the expected industry losses. Available catastrophe models provide a ready source of industry loss distributions. Conceptually it is simple to go from a given industry loss distribution to pricing an ILW, but ILWs can vary in their terms and conditions depending on the needs of a particular client. This paper shows how to account for some of these terms and conditions to price ILWs and provides an example of such calculations.