Industry loss warranty (ILW)
Risk-transfer instrument triggered by the loss level of the whole industry rather than by the buyer's own loss.
An industry loss warranty (ILW) pays on the whole market's loss, not the buyer's own: an instrument halfway between reinsurance and a financial product, whose trigger depends on the insured loss level suffered by the whole industry following an event, measured by a recognized market index. When the industry loss exceeds a predefined threshold, the seller pays the buyer an agreed amount. This instrument allows an insurer or reinsurer to quickly cover a catastrophe exposure with simple documentation, while exposing itself to basis risk: the possible gap between its own loss and the industry loss that triggers payment. Favored by funds specialized in insurance risk for its liquidity and standardization, it is part of the alternative risk-transfer ecosystem alongside catastrophe bonds. For the underwriter, the choice of index and threshold determines the effectiveness of the cover and the extent of basis risk assumed.
Textbook case: a reinsurer buys an industry loss warranty triggered if the insured losses of a hurricane exceed a market threshold, independently of its own loss experience.
ILW, industry loss warranty, industry loss trigger
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