A lack of access to reliable and independent sources of industry loss estimates has impaired the market for industry loss warranties (ILW) in Japan, according to a new report from PCS, a Verisk business.
The report looked at the impact of potential underreporting by informal loss reporting data sources, as well as how ILW parties can use improved tools to prevent such problems in the future.
The market for ILWs covering risks in Japan is estimated to range from US $500 million to $1 billion, making it a large segment of all ILWs traded, particularly after the US/North America.
However, as a result of ILW triggers not performing as expected, the risk transfer market has experienced trapped collateral, realised significant basis risk, and been prevented from renewing expiring covers because of collateral issues.
PCS reported that trigger underperformance has had a profound and tangible impact on the ILW market, and argued that a disciplined loss reporting solution could make a significant difference.
Additionally, while PCS Japan will provide a certain amount of support for the global ILW market going forward, the report noted that gaps in coverage could still cause a repeat of the 2018 market impact if the use of informal trigger data sources continues.
“It can be hard for cedents and markets to say no,” said Tom Johansmeyer, head of PCS. “Some ILW trades are the result of significant business pressure, which means you just go with the best trigger you can find, even if the data source isn’t intended for use in triggering a risktransfer transaction.”
“Protection buyers and sellers need to understand that remote risks are just that: remote; they aren’t impossible,” he explained. “The basis risk associated with informal trigger data can become a real problem when the wind blows or the ground shakes.”
“That’s why we launched PCS Japan, and it’s why we’re focused on further PCS expansion,” Johansmeyer continued. “We just launched in Mexico as a way to help the market, and we’re continuing to explore other regions that require a disciplined, independent, and reliable loss reporting agency.”
“With seven decades of experience and involvement in the catastrophe bond market almost from its inception, PCS has a commitment to being first to market with new solutions for our clients. Nobody brings the talent, depth, resources, and credibility that we do.”
Alex Mican, director, Specialty Lines Product Development, also commented: “We wrote this white paper to help our clients understand on a broader scale the sources of some of the tactical challenges they wanted to discuss with us.”
“Our goal with A Critical Look at 2018 has been to provide more context to the 2018 catastrophe events in Japan and how they impacted our clients in the ILW market,” he added. “We see it as a tool we can use to provide more support to the ILW market worldwide.”