How Verisk develops industry exposure indexes

The VGCSI measures aggregate values of capital stock over time for countries and areas included in Verisk's extreme event models. Industry exposure indexes are based on a formula that projects historical losses to the present, capturing both increases in a country's wealth (capital stock of buildings) and inflation at the country level.

The industry exposure index is a ratio that measures the relative change from a base year to a current year, as follows:

Industry Exposure Index = [(BaseYearBuildingValue +
        NewConstruction)*CostIndex]/BaseYearBuildingValue

BaseYearBuildingValue is represented at the national level by the gross capital stock of buildings in the base year (Industry Exposure Database vintage year), while NewConstruction is represented by the value of new construction (less disposals) since the base year. The CostIndex captures price changes over time. Gross capital stock effectively measures replacement cost estimates of residential and commercial building stock and is directly comparable to each country's database.

We derive capital stock values for the VGCSI using a time series of capital stock investment (a component of GDP) and the perpetual inventory method. The perpetual inventory method is an accounting method that measures the accumulation of annual gross fixed capital investment while deducting for the value of assets that have reached the end of their service lives. It measures the stock of fixed assets surviving from past investment at current-year prices, capturing both inflation and real changes in value. Gross fixed capital investment data is widely available for many countries, and the perpetual inventory method is the standard approach used by national statistics offices for estimating capital stocks.

Verisk develops a VGCSI for each country each time an Industry Exposure Database is created; this is part of the reasonability checks for the observed changes from the prior database vintage. Independently checking the database values with the index has consistently shown that it is a robust predictor of increases in an Industry Exposure Database.