These contracts will allow the real time electronic trading of property damage risk exposures, including hurricane risk through a cleared futures exchange. The contracts will be financially settled against the 'Re-Ex Index', which will be created by Gallagher Re.
Property Claims Services(R) (PCS(R)), a market authority on property losses from catastrophes in the US, has agreed to supply the data that will be used to create the 'Re-Ex Index' upon which the contracts are based. Additionally, the 'Re-Ex Index' will be provided to NYMEX on a daily basis to state those losses greater than US$25m as estimated by PCS(R).
The record losses caused by hurricanes Katrina, Rita and Wilma in 2005, in particular, have been the catalyst in creating a well documented shortage of insurance and reinsurance capacity for natural perils exposures, particularly hurricane risk. The requirement for protection against such risks is at a record high due to the combination of changing weather patterns, recent loss activity and the consequent change in industry peril modelling, rating agency criteria and solvency requirements.
The property damage risk contracts will provide access to trading of these risks in the capital markets in the form of a new cleared derivative instrument which is not currently available. For 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.
