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Presentation to: WRMA Conference June 3, 2008 Hurricane Panel Industry Loss Warranties (ILWs). Mariagiovanna Guatteri, PhD Swiss Re ILS Trading. Buyers of Protection. Typical buyers include: Insurers and reinsurers Purpose: To hedge portions of their risk or to balance their portfolios.

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Presentation Transcript

Presentation to:

WRMA Conference

June 3, 2008

Hurricane Panel

Industry Loss Warranties (ILWs)

Mariagiovanna Guatteri, PhD

Swiss Re ILS Trading

ilws what are they

Buyers of Protection

  • Typical buyers include: Insurers and reinsurers
  • Purpose: To hedge portions of their risk or to balance their portfolios
ILWs: What are they?
  • ILWs are reinsurance contracts whose payouts are linked to a predetermined trigger of estimated industry losses.
  • Three general forms of ILWs/Swaps include: Reinsurance, Customized Swap, Standardized Swaps (SNaCSTM)

(Seeking Protection)

(Taking Risk)





Sellers of Protection

  • Typical sellers include: Insurers, reinsurers, hedge funds and money managers
  • Purpose: To take on more risk or to diversify their portfolios
features of ilw and cat derivative contracts
Features of ILW and Cat Derivative Contracts
  • ILWs can be used to hedge cat bond portfolio exposure. For example, a position in a cat bond with an industry-based trigger can be hedged by buying protection through an ILW defined with the same or similar trigger.
european market loss index
European Market Loss Index


Index governance structure and methodology

  • Swiss Re has been within an industry working group to develop a European Industry Loss Index
  • The Group consists of Swiss Re, AXA, Zurich, Allianz and Munich Re. The working group expects further support prior to implementation


  • Create an independent entity to collect a pre-event exposure portfolio and post event loss calculation; initial focus of the index is on European wind and expand to other perils over time
  • Pre-event exposure portfolio will be of significant value to the industry in terms of pricing, risk management, benchmarking and improving risk modellers industry models
  • Post-event industry loss index to support the development of risk trading solutions (e.g., ILWs)
contract timeline event example 1

15-NOV-07 PCS Estimate 3bn

15-JAN-08 PCS Estimate 3.8bn

20-FEB-08 PCS Estimate 5bn

28-APR-08 PCS Estimate 4.9bn

30-APR-08 Termination – No Payment

15-OCT-07 Event

31-JAN-07 1st Extended Termination Date

31-MAR-08 3rd Extended Termination Date

30-APR-08 4th Extended Termination Date

29-FEB-08 2nd Extended Termination Date

Start Date

31-DEC-07 Risk Period End Date

Final Extended Termination Date

Contract Timeline: Event Example 1

US Wind 20bn Contract

- Extended until the Extension Threshold is no longer met.

advantages and disadvantages to ilws
Advantages and Disadvantages to ILWs



  • Provides an alternative form of natural catastrophe and insurance risk in the capital markets
  • They are not correlated to financial markets
  • Effective means of hedging and diversification of portfolio risks
  • Attractive risk-adjusted returns with different underlying risks from other fixed income instruments like corporate bonds and asset-backed securities
  • Several risks embedded in ILW instruments – some such risks include:
    • trigger risk
    • pricing and liquidity risk
    • development period risk
    • counterparty credit risk
    • basis risk
  • Price differentials possible between cat bond and corresponding ILW depending on capacity, size and market inefficiencies
standardization documentation and products
Standardization: Documentation and Products



  • Improved Transparency
  • Improved Credit/Counterparty exposure management.
  • Standardized and understood terms.
    • No additional terms negotiation
    • Reduces legal cost and legal risk
    • Easier back office processing
    • Reduces basis risk, development mismatch, pricing and liquidity risk
  • Improved liquidity
  • Easy to use electronic platforms
  • Cross Exchange and Product trading strategies possible.

ISDA Standardized Documentation


Several Futures products

  • Improved Transparency
    • Less arbitrage-type profits
  • Standard contracts may not exactly meet needs of counterparties
  • Limited trigger development may hinder creativity
important notice
Important Notice

This information is issued by Swiss Re Capital Markets Corporation ("SRCM Corp") and Swiss Re Capital Markets Limited (“SRCML”), together Swiss Re Capital Markets (“SRCM”). SRCM Corp is a member of the National Association of Securities Dealers, Inc. (“NASD”) and the Securities Investor Protection Corporation (“SIPC”), and is regulated by the NASD. SRCML (FSA Register Number 187863, VAT Registration number 244797524) of 30 St Mary Axe, London, EC3A 8EP is a company authorised and regulated in the conduct of its investment business in the UK by the Financial Services Authority (“FSA”) and is entered in the FSA’s register. The FSA's website contains a wide range of information of specific relevance to UK customers and provides access to the FSA register. This information is only intended for professional investors. Persons who receive this communication who are not professional investors should not reply or act upon its contents. The investments and investment services referred to are not available to private customers within the meaning of the rules of the FSA. Persons dealing with SRCML outside the UK are not covered by all the rules and regulations made for the protection of investors in the UK, and may not have the right to claim through the UK's Financial Services Compensation Scheme. This information is confidential and proprietary to us and is solely for your use and is not intended for any further dissemination. This document remains our property and must be returned to us on request and any copies you have made must be destroyed. It may not be reproduced or circulated without our written permission and may not be distributed in any jurisdiction where such distribution is restricted by law or regulation. Nothing in this document should be construed as legal, tax or investment advice nor interpreted as recommending any investment in any particular product, instrument or security and should not be relied on as the sole source of information upon which to base an investment decision. Unless otherwise agreed in writing, SRCM and its affiliates (“Swiss Re”) are not acting as your financial adviser or fiduciary. This document is for information purposes only and does not constitute an invitation or inducement or an offer or commitment, a solicitation of an offer or commitment, or any advice or recommendation, to conclude any transaction. While information herein has been obtained from sources believed to be reliable, we do not represent it to be accurate or complete. The information contained herein includes illustrations, estimates and projections and involves significant elements of subjective judgment, assumptions and analysis. Any views or opinions (including illustrations, estimates, statements or forecasts) constitute our judgment as of the date indicated and are subject to change without notice. No representation is made as to the accuracy of such illustrations, estimates or projections or that all assumptions relating to them have been considered or stated or that such projections or returns will be realised. The returns or performance results may be lower than estimated herein. Note that past performance is not indicative of future results. The information contained herein does not purport to contain all of the information that may be required to evaluate such solutions and you are encouraged to conduct independent analysis of the data referred to herein. We do not undertake to update this document. Before you enter into any transaction, you should ensure that you fully understand the potential risks and rewards of that transaction and you should consult with such advisers as you deem necessary to assist you in making these determinations. Neither of us should rely on any representation or undertaking inconsistent with the above paragraphs. SRCM is not authorised to arrange insurance or reinsurance products, and if any such solutions are required an appropriate entity within the Swiss Re group would arrange or provide such product.