Industry Loss Warranty (ILW)
A binary reinsurance contract that pays out when total insured industry losses from an event exceed a defined threshold.
An industry loss warranty (ILW) is a binary reinsurance or derivative contract that pays a fixed amount when total insured losses across the entire insurance industry from a single event exceed a pre-agreed threshold — for example, $30bn from a US hurricane. The payout is triggered by industry-wide loss estimates from services like PCS (Property Claim Services) or PERILS, not the individual cedant's own losses.
The binary nature means either the full limit is paid (trigger exceeded) or nothing (trigger not reached). This simplicity makes ILWs fast to settle — typically within 60–90 days — but introduces basis risk: the industry loss may exceed the trigger while the individual cedant's losses are modest, or vice versa.
ILWs are used primarily for hedging and retrocessional purposes by reinsurers, cedants, and ILS funds.
Example usage
“The reinsurer purchased a $100m ILW with a $25bn US hurricane trigger to hedge its residual cat exposure after placement.”
Frequently asked questions
What is Industry Loss Warranty (ILW)?
A binary reinsurance contract that pays out when total insured industry losses from an event exceed a defined threshold. An industry loss warranty (ILW) is a binary reinsurance or derivative contract that pays a fixed amount when total insured losses across the entire insurance industry from a single event exceed a pre-agreed threshold — for example, $30bn from a US hurricane. The payout is triggered by industry-wide loss estimates from services like PCS (Property Claim Services) or PERILS, not the individual cedant's own losses.
How is Industry Loss Warranty (ILW) used in practice?
The reinsurer purchased a $100m ILW with a $25bn US hurricane trigger to hedge its residual cat exposure after placement.
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