The Risk Management Solutions modeling firm said it has partnered with WeatherFlow Inc. to launch a monitoring system to certify when a weather event hits a wind speed powerful enough to trigger event-linked securities.
A business with a derivative or catastrophe bond issued to provide coverage against a certain level of wind would use the system, and RMS would serve as the calculation agent. "RMS does a calculation if an issuer believes the wind speed limit is hit," explained Peter Nakada, RMS Consulting managing director.
Newark, Calif.-based RMS said the system is called the "WindX" parametric index, noting that the companies are bringing it online for what is expected to be a highly active 2007 Atlantic basin hurricane season.
The companies said WindX wind speed data could tell when winds hit high enough levels to trigger coverage from a wide range of financial structures, including over-the-counter derivative contracts, industry loss warranties and catastrophe bonds.
Scotts Valley, Calif.-based WeatherFlow has a network of hurricane-hardened weather stations that will provide wind speed measurements for the WindX system, the companies said.
WeatherFlow said it is expanding its coastal weather observation system by adding weather stations specifically designed to survive and accurately record hurricane force winds.
The first phase of the expansion, the companies said, involves installing over 100 weather stations in vulnerable areas, based on likely storm paths and potential for economic loss.
More than a dozen stations are in place for transactions structured prior to the 2007 hurricane season, and installations will continue over this season, the firms said.
The first phase of installation will be completed prior to the 2008 season. RMS said it will provide its wind field model for interpolating among stations, and will ensure the network design meets the needs of insurers, reinsurers and investors.
WeatherPredict Consulting Inc.–a subsidiary of RenaissanceRe–has been involved as an advisor for the WindX team, providing expertise on customer and market needs, the firms noted.
"The WindX parametric index will for the first time allow insureds, insurers and reinsurers to separate hurricane hazard risk from the more uncertain property vulnerability risk," according to RenaissanceRe's president, Bill Riker.
"We believe hurricane and other pure hazard risk is more understandable and thus more attractive to emerging capital markets players accepting catastrophic risk," he added.
"The WindX solution will address a longstanding problem in the catastrophe-linked securities market–how to design an index that provides investors with simplicity and transparency, yet provides insurers or reinsurers the ability to tailor the index to their risk profiles," said Mr. Nakada.
John Brynjolfsson, managing director for the PIMCO income management firm in Newport Beach, Calif.–who heads his firm's Event-Linked Bond effort–said "this development addresses a national problem, and is exactly what policyholders, market participants and regulators need in order to finalize the marriage of the insurance and capital markets."
He added that "capital market investors buying event-linked securities demand the type of scientific credibility, transparency and objectivity that the WindX parametrix index and the RMS organization bring to the risk transfer equation."
Mr. Nakada said he thought the system could be used for derivative instruments this year, but it was too close to the hurricane season for the lengthy process involved in generating a catastrophe bond.
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