These agreements are usually documented as reinsurance contracts between the parties. If so, in addition to the industry loss trigger the contract will include an "ultimate net loss clause" which specifies that the protection buyer must demonstrate that they have lost a specified amount as well.
ILWs are sometimes referred to as Original Loss Warranties (OLWs) or Original Market Loss Warranties, but this usage is becoming increasingly rare.
The ILW market has no recognized exchange or clearing source to track volumes. Size estimates range from $2bn to $10bn outstanding (Aon, Nephila). The pre-Katrina market in terms of outstanding contracts was likely near the low end of that range and the post Katrina market is likely to have moved upward within that range.
Many catastrophe bonds are triggered by industry-based triggers and trade with reference to pricing in the ILW markets.
These contracts are often negotiated directly between parties. In addition, brokers including Willis, RK Carvill and Access Re publish estimated bid and offer levels and attempt to arrange trades. Catastrophe bond traders including Swiss Re and Goldman Sachs have indicated their intention to trade these instruments.
Dead Cat contracts are traded on an event that had already occurred, but for which the total amount of industry loss is not yet known. Some market participants refer to contracts against perils which are out of season (for example, hurricane contracts outside of hurricane season) as dead cats.
Back-up Covers provide protection for events that occur following the occurrence of a catastrophe.
Hot cat contracts: industry loss warranties are growing in popularity as insurers look to balance their risks and fill in gaps in traditional catastrophe coverage.
Apr 01, 2006; Key Points * Industry loss warranties are a creative risk management tool for insurers looking to balance their portfolios. *...
Are Capital Markets Here to Stay? Ever since the Early 1990s, Economists Have Been Forecasting a New Era for Insurance-One Dominated by the Capital Markets. Has That Time Finally Come?
Aug 01, 2007; Insurance is a financial product, one of the oldest known to man, and has always been at the forefront of risk management. The...
New capital flow slows: the softening property catastrophe market is likely to stem the tide of fresh capital flowing into the industry, which could be a boon for the market.(Reinsurance/ Capital Markets: Catastrophe Markets)
May 01, 2007; The stream of cash from hedge funds and private equity flowing into the reinsurance market could diminish somewhat in 2007, in...