Markets looking at insurance event-linked futures

As preparations for the next hurricane season proceed apace, the insurance industry continues to look for ways that capital markets can be used as the basis for building up capital this time, the industry is looking at event-linked insurance futures, according to A.M. Best.Insurance Futures Exchange Services Ltd (IFEX), a member of the Climate Exchange Plc group of companies, and Deutsche Bank AG in September 2007 announced the planned launch of trading in catastrophe event-linked futures (ELF) on the Chicago Climate Futures Exchange (CCFE).ELF contracts are standardized exchange-traded futures derivatives contracts, also know as “contracts for difference.” Their value is pegged against aggregated industry loss calculations.The contracts provide a binary payment based on natural catastrophe events that result in industry-wide insured losses, similar to the Industry Loss Warranty (ILW) features found in some insurance agreements.Simply put, payment is based on whether event-based losses hit above or below a loss target determined by industry data.ELF contracts offer investors the ability to trade natural catastrophe loss risk outside the framework of conventional insurance and reinsurance contracts. They also provide hedging contracting capability for property/catastrophe insurance-linked exposureA.M. Best notes that with four months to go until the start of the hurricane season, insurers are taking a harder look at using futures as a tool to protect themselves from substantial windstorm losses.”The insurance market trades contracts of indemnity, which is an open-ended promise to pay,” says Neil Eckert, IFEX chairman and chief executive of Climate Exchange plc. “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.”