This is a short summary explaining Industry Loss Warranties (ILWs). ILW is explained in detailed in Actuarial SP7 subject (formerly ST7).
Definition of ILW
Industry loss warranties (ILWs) are a type of reinsurance contract where the basis of cover is not indemnity, i.e. repayment of actual losses suffered. Protection is based on the total loss arising from an event to the entire insurance industry rather than individual insured company’s own losses.
Trigger Event for ILWs
The original size of the industry loss is used as a trigger for eligibility to a recovery.
Often, the industry loss trigger is fixed, with reference to published information or a known CAT model.
Breach of a second indemnity-based trigger is the basis of payment and is with reference to the value of the losses incurred by the insured.
The second trigger ensures that the insured has an insurable interest in the cover.
Payments in ILWs
The ILWs contract pays a specified fixed amount to the insured if there has been an insured loss of a particular type, eg a hurricane, to the insurance industry of a particular size.
The payout in Industry loss warranties to the insured may be fixes, so there is a potential mismatch that works in favour or against the insured.
Due to the nature of the contract, reinsurer payment should be quite quick once the insurer makes a claim.
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