Gallagher Re and the New York Mercantile Exchange today announced they have reached an agreement allowing NYMEX to list future contracts for real-time electronic trading of property damage risk exposures, including hurricane risk.
The trading of the Property Damage Risk contracts is subject to regulatory approval by the Commodity Futures Trading Commission, the two organizations said, noting that this marks the first time insurance and reinsurance risk will be actively traded on a real-time basis through an exchange offering clearing house facilities.
It is intended that the contracts will create a liquid market environment for the trading of property damage risk and facilitate the introduction of new capacity into the market, Gallagher Re and NYMEX said.
The contracts will be financially settled against the "Re-Ex Index," an index which is to be created by Gallagher Re.
The index will be based upon data that will be supplied by Property Claims Services, a unit of the Insurance Services Office.
According to Gallagher Re, the "Re-Ex Index" will be provided to NYMEX on a daily basis to state those losses greater than $25 million as estimated by PCS.
The Property Damage Risk contracts will provide access to trading of natural perils risks in the capital markets in the form of a brand-new cleared derivative instrument which is not currently available, Gallagher Re and NYMEX said in a statement.
Larry Tucker, managing partner of Gallagher Re's UK-based operations and leader of the project team, said: "Despite the relatively benign hurricane season this year, demand for property damage cover continues to vastly outstrip supply. The way in which reinsurance contracts are currently negotiated, which has remained virtually unchanged for decades, serves only to frustrate that process."
Mr. Tucker said, "Against this backdrop, the market has seen an increasing presence of the capital markets, particularly hedge funds, within the reinsurance space." He said this challenges existing methods by providing cover directly, such as collateralized reinsurance contracts and cat bonds.
"These Property Damage Risk contracts have been designed to bring the transparency, immediacy and liquidity of the capital markets to the insurance sector," he continued.
He also noted that the contracts will provide participants with the opportunity to trade a new asset class which has little or no correlation to other asset classes.
A patent application is pending for the business method used in trading and the contracts themselves.
Gallagher Re, a specialist reinsurance intermediary and advisory firm, is a division of Arthur J. Gallagher & Co., an international insurance brokerage and risk management services firm headquartered in Itasca, Ill.
The New York Mercantile Exchange is the world's largest physical commodity futures exchange.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.