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RMS Debuts Earthquake Risk Parametric Industry Loss Index

Paradex U.S. Earthquake combines ground shaking data from U.S. Geological Survey (USGS) ShakeMaps with industry exposure data to calculate insured loss estimates.

Risk Management Solutions (RMS; Newark, Calif.) has launched a new parametric index for estimating insured industry losses from U.S. earthquakes, complementing the vendor's existing suite of indices for U.S. Hurricanes and European windstorms. Paradex U.S. Earthquake combines ground shaking data from U.S. Geological Survey (USGS) ShakeMaps with industry exposure data to calculate insured loss estimates, which can be used to structure and monitor catastrophe bonds, industry loss warranties, and derivative contracts.

Paradex provides insured loss estimates by postal code and line of business for all 50 U.S. states and includes damage from ground shaking, fire following earthquake, and sprinkler leakage, according to an RMS source. These granular insured loss estimates are designed to help issuers to minimize their basis risk'— the risk that a security would not sufficiently cover actual losses from an event'— by tailoring the index to match their exposures and lines of business. The new index enables catastrophe risk to be transferred to the capital markets quickly and transparently, with contracts settling in 40 business days or less following an event'— compared to up to a year for indices that involve polling the industry'— giving insurers and reinsurers quicker access to the capital needed to pay claims, the vendor asserts. Investors benefit from standardized insurance-linked security (ILS) structures that are based purely on hazard data; they do not need a comprehensive understanding of the insurance claims process to assess the attractiveness of an investment structured using Paradex, RMS claims.

"Paradex offers insurers and reinsurers a straightforward way to transfer earthquake risk based on location-specific ground motion. To date, this approach has only been available through complex parametric cat bonds; now Paradex makes it accessible to simpler structures such as Industry Loss Warranties," comments Peter Nakada, managing director, RMS dedicated ILS team, RiskMarkets.

The Paradex Europe Windstorm index was used in December to structure Atlas VI Capital Ltd to provide SCOR with 75 million of protection against European windstorms as well as Japanese earthquakes, according to the RMS source.

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio

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