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The Loss File after Harvey, Irma and Maria (HIM) – WYSIWYG II |
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The Loss File after Harvey, Irma and Maria (HIM) – WYSIWYG II
November 30, 2017
By: Morton N. Lane, President; Roger Beckwith, Vice President
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Is this an arbitrage I see before me? |
April 30, 1998. Also published in The Risk Financier, June 1998.
Open
interest at The Chicago Board of Trade (CBOT) jumped almost 20 percent
during the month of April and now stands at 22,000 contracts. Some
half-dozen transactions have now been consummated at The Bermuda
Commodities Exchange (BCE) and open interest has become visible. At
The Catastrophe Risk Exchange (CATEX), message activity (i.e.,
inquiries and responses) has jumped 32 percent since January. Clearly,
increasing numbers of people are beginning to pay attention to these
new risk transfer markets.
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June 30, 1997.
Insurance
companies writing property covers in the US often find themselves with
concentration of risks in catastrophe-prone areas. They “hedge” such
risks by buying reinsurance. Even the reinsurers themselves “hedge” by
buying retrocessional covers. Now, with the PCS Option contract at the
Chicago Board of Trade “synthetic” insurers (i.e., traders who write
call options or call spreads) can protect against regional exposures by
“hedging” or buying back regional contracts.
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If it's good enough for Warren Buffett... |
December 15, 1996.
On
November 18, Chuck Quackenbush, the California Insurance Commissioner,
announced that Berkshire Hathaway would underwrite an entire layer of
the California Earthquake Authority (CEA). This layer, $1.5 billion XS
$7 billion, was originally intended to be the underpinning for the
precedent setting California Earthquake Bond. This bond was seen as a
defining moment for the direct entry of capital markets into
reinsurance and the subsequent securitization and derivatization of
insurance. It is obviously a great disappointment to Morgan Stanley,
the bond underwriter.
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November 26, 1996. Also published in The Risk Financier, May 1997.
Three
times in the last ten years, annual aggregate catastrophic losses for
the entire US, as measured by PCS, have exceeded $8 billion* (1994, $16
billion; 1992, $27 billion; and 1989, $14 billion). Prior to 1989 no
year’s aggregate exceeded that level. In 1995, losses approached $7.8
billion. Losses for the first eleven months of 1996 are $6.8 billion.
Actual numbers are illustrated in the graph on the following page.
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Strategy for the Grand National |
November 12, 1996.
Introduction of the new National Annual PCS contract (October 7, 1996) makes for some interesting trading opportunities.
Consider the following trade:
Sell the 1997 National Annual 80/100 call spread at 9.0 points
Buy the 1997 Western Annual 80/100 call spread for 2.1 points
Buy the 1997 Eastern Third Quarter 80/100 for 2.5 points
for a credit for the position of 4.4 points.
QUESTION: Is a 22% RoL enough return for the non-western, non-hurricane quarter U.S. annual aggregate risk?
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