With four months to go until the start of the hurricane season, insurers are taking a harder look at a new tool in the eternal battle to protect themselves from substantial windstorm losses: exchange traded futures contracts, according to a story in BestWeek Europe.
Such contracts are called event linked futures, and have been traded on the Chicago Climate Futures Exchange since September 2007 by an equally new company called Insurance Futures Exchange Services Ltd. Based in London, IFEX is offering what it describes as a family of exchange traded futures contracts linked to industry insured losses from specified natural catastrophe events.
According to IFEX, over the past 10 years the insurance and capital markets have been converging. As a result, the market has seen new instruments such as catastrophe bonds and alternative risk transfer vehicles. IFEX regards ELFs as being the logical next step, said Neil Eckert, IFEX chairman and chief executive of Climate Exchange plc, which owns it.
“If you take global risk transfer, the whole of the rest of the world trades, transfers and hedges risk via contracts of difference,” he said. “The insurance market trades contracts of indemnity, which is an open-ended promise to pay. Contracts of difference allow you to evaluate your exposure to mark to market, you get overnight settlement, and not wait 45 days for your premiums and potentially years for your claims.
“The financial community are used to it, it’s electronic, there is a standard contract and not eight different policy wordings for each type of policy,” he said. “It’s more capital efficient because you have overnight settlement and you post margin then the clearing corporation and clearing members can account, on a daily basis and keep track of people’s positions.”
Also, in BestWeek U.S./Canada:
-- It’s been a year since Bermuda based specialty insurer Ironshore burst on the insurance scene with $1 billion of capital in its pockets and a determination to patch a hole in the U.S. property catastrophe market.
-- The failure of comprehensive health-care reform legislation in California will set back major reforms by at least a year, but the door may remain open for consideration of smaller scale efforts in 2008.
And in both editions of BestWeek:
The Best’s Global Insurance Composite Index finished the week of Febuary 7 down 10.56% from a year ago. The composite index reflects the performance of 172 insurance stocks. The week’s top stocks were National Interstate Corp., Independence Holding Co., Omega Insurance Holdings, National Atlantic Holdings, and First Mercury Financial Corp.
The bottom five stocks were Prudential Financial, Aviva, Unitrin, Humana, and Zenith National Insurance Co.