6 Overlooked Real Estate Risks
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Damages wrought by the natural catastrophes of 2017 were a wake-up call for companies of every industry. No business should assume it is safe.
Of particular concern is the risk of non-physical damage business interruption, where a facility sustains minimal damage itself, but suffers a lapse in normal operations due to devastation to their immediate area. Loss of infrastructure and loss of attraction can keep customers at bay for significant lengths of time.
Traditional business interruption policies, however, only kick in when the insured entity sustains physical damage. No damage means no coverage.
That’s why companies with significant exposure to non-physical damage business interruption have begun to utilize parametric insurance to supplement traditional policies.
Parametric policies are index-based solutions that trigger a payout as long as an event meets certain severity thresholds, without necessarily requiring the insured asset to sustain physical damage. Thresholds can refer to wind speed, earthquake magnitude, or hurricane category as measured at predetermined locations. If the parameters are met, pre-determined payouts are issued within 30 days; no need for adjusters or a lengthy claims process.
“Once a parametric policy is triggered, the insured simply has to provide a certification of loss that is equal or greater to the payout amount, usually within 12 to 24 months of the event,” said Robert Nusslein, Head Innovative Risk Solutions Americas, Swiss Re Corporate Solutions.
Over the last decade, uptake of parametric policies has grown exponentially, and the growth is not limited to any one industry. Hospitality, energy, public entities, utilities, and health care organizations have all been buying parametric coverage.
“The common theme across these disparate buyers is that they all have an unmet need,” Nusslein said.
“Many companies have very high deductibles for hurricane and earthquake coverage, from 2 to 5 percent of their total insurable value. This amounts to a very large self-insured risk. They have a need for supplemental limit to cover uninsured or underinsured exposures or to fill in deductibles.”
Recent iterations of parametric solutions that allow for more flexibility and customization are driving increased uptake of these policies as supplements to traditional business interruption coverage.
First-generation parametric products debuted more than 20 years ago. Along with triggers set around event intensity, these polices also stipulated a defined geographic region in which the event must occur, usually a radius centered around the insured location.
“These are what we call ‘CAT-in-the-circle’ solutions,” Nusslein said. “They define a geographic area with a center on the latitude and longitude coordinates encompassing the insured assets. A policy trigger would require that the epicenter of an earthquake or eye of a hurricane be within that area.”
The downside of these policies is that they introduce basis risk — the risk that a sustained loss will exceed insurance recovery.
“Let’s say a policy has a payout triggered by a 6.5-magnitude earthquake with an epicenter within a 40-mile radius of the insured location. If a quake occurs within that region but is only a 6.2 in magnitude, or if it is 7.0 in magnitude but the epicenter is 41 miles away from the insured facility, there’s no cover,” Nusslein said. “The insured will likely still have damage but will recoup nothing from that policy. That’s basis risk.”
The second generation of parametric policies eliminates this gap by doing away with defined geographic regions as triggers.
“The coverages evolved to designate certain severity thresholds at specific locations, rather than within a radius. So it would not matter where the epicenter of the quake is as long as the shake intensity meets a certain level at your facility,” he said. “This is much more flexible and nimble and reduces basis risk.”
The third generation of parametric structures allows even more flexibility by creating “either/or” triggers — a design driven by the convergence of multiple factors of wind, rain and storm surge that make hurricanes so damaging.
“What made Hurricane Harvey so devastating was that in addition to being a wind event, it also created storm surge that pushed a lot of water up where the eye made landfall, which was then compounded by several feet of rainfall,” Nusslein said.
That drove exploration into the possibility of having custom triggers for each one of those factors, so even if wind speeds didn’t meet the designated threshold, a significant storm surge could still trigger the policy.
“Each evolution of parametric coverages has been driven by companies needing a way to better protect themselves from natural catastrophes. As brokers and buyers have become more sophisticated and aware of their exposure, they’ve asked for more customized solutions to meet their needs,” Nusslein said.
While the most common parametric covers address natural catastrophes like earthquakes and hurricanes, there is considerable interest in adapting the policies to respond to non-cat weather events like flooding, fire, snowfall, hail and temperature fluctuations.
Some solutions go beyond weather to focus on industry-specific triggers, like drops in occupancy rates or revenue per available room for hotels, decreased passenger seat miles flown for airlines, or reduced container traffic through a port resulting in tax revenue loss.
“Swiss Re Corporate Solutions is already developing products in these areas,” Nusslein said. “We listen to our broker partners and our clients to really hear what they need, and we have the intellectual curiosity to keep innovating to meet those needs.”
Swiss Re Corporate Solutions’ involvement in parametric structures goes back to their inception roughly 25 years ago, and it has remained dedicated to the space ever since, building a deep bench of atmospheric specialists, seismic specialists, geologists and data scientists.
“Our NAT CAT perils team and our ability to develop our own models around hurricane and seismic activity is second to none,” Nusslein said.
But with speed of payment a primary benefit of parametric insurance, understanding NAT CAT exposure is only half of the equation. Getting funds into the hands of policyholders quickly is where insurers really deliver value. The one-two-three punch of Harvey, Irma and Maria last year would test the mettle of any top-tier carrier.
“It was all-hands-on-deck here to make sure we could deliver on time. We had a number of claims on parametric policies, and we met the 30-day deadline for every one of them. Some payments were delivered in as few as 13 days,” Nusslein said.
“It was a testament not only to the expertise and commitment of our people, but to the strength of Swiss Re’s balance sheet and its reputation for reliability built over our 150 years in the industry.”
To learn more about Swiss Re Corporate Solutions’ parametric solutions, visit https://corporatesolutions.swissre.com/innovative_risk/parametric/.
Insurance products underwritten by Westport Insurance Corporation, Overland Park, Kansas, a member of Swiss Re Corporate Solutions. This article is intended to be used for general informational purposes only and is not to be relied upon or used for any particular purpose. Swiss Re shall not be held responsible in any way for, and specifically disclaims any liability arising out of or in any way connected to, reliance on or use of any of the information contained or referenced in this article. The information contained or referenced in this article is not intended to constitute and should not be considered legal, accounting or professional advice, nor shall it serve as a substitute for the recipient obtaining such advice.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Swiss Re Corporate Solutions. The editorial staff of Risk & Insurance had no role in its preparation.
R&I: What was your first job?
I was trained as an accountant, worked in public accounting and became a CPA. Being comfortable with numbers is helpful in my current role, and obviously, the language of business is financial statements, so it helps.
R&I: How did you come to work in risk management?
Working in finance in the corporate environment included the review of budgets and the analysis of business expenses. I quickly found the area of benefits and insurance — and how “accepting risk” impacted those expenses — to be fascinating. I asked a lot of questions. Be careful what you ask for — I soon found myself responsible for those insurance areas and haven’t looked back!
R&I: What is the risk management community doing right?
I have found the risk management community to be a close-knit group, whether that’s industry professionals, risk managers with other companies or support organizations like RIMS and other regional groups. The expertise of the carriers and specialty vendors to develop new products and programs, along with the appropriate education, will continue to be of key importance to companies going forward.
R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?
As I’m sure many in the insurance field would agree, Hurricanes Katrina and Rita in 2005 changed our world and our industry. It was a particularly intense time and certainly a baptism by fire for people like me who were relatively new to the industry. This event clearly accelerated the switch to the acceptance of more risk, which impacted mitigation strategies and programs.
R&I: What emerging commercial risk most concerns you?
The fast-paced threat that cyber security represents today. Our company, like so many companies, is reliant upon computers, software and IT expertise in our everyday existence. This new risk has forged an even stronger relationship between risk management and our IT department as we work together to address this growing threat.
Additionally, the shooting event in Las Vegas in 2017 will have an enduring impact on firms that host large gatherings and arena-style events all over the world, and our company is no exception.
R&I: What insurance carrier do you have the highest opinion of?
With the various types of insurance programs we employ, I have been fortunate to work with most of the large national and international carriers — all of whom employ talented people with a vast array of resources.
R&I: How much business do you do direct versus going through a broker?
We use brokers for many of our professional coverages, such as property, casualty, D&O and cyber. We are self-insured under our health plans, with close to 25,000 members. We tend to manage those programs internally and utilize direct relationships with carriers and specialty vendors to tailor a plan that works best for team members.
R&I: Who is your mentor and why?
I have been fortunate to have worked alongside some smart and insightful people during my career. A key piece of advice, said in many different ways, has served me well. Simply stated: “Seek to understand before being understood.”
What this has meant to me is try everything you can to learn about something, new or old. After you have gained this knowledge, you can begin to access and maybe suggest changes or adjustments. Being curious has always been a personal enjoyment for me in business, and I have found people are more than willing to lend a hand, offer information and advice — you just need to ask. Building those alliances and foundations of knowledge on a subject matter makes tackling the future more exciting and fruitful.
R&I: What have you accomplished that you are proudest of?
Our benefit health plan is much more than handing out an insurance card at the beginning of the year. We encourage our team members and their families to learn about their personal health, get engaged in a variety of health and wellness programs and try to live life in the healthiest possible way. The result of that is literally hundreds of testimonials from our members every year on how they have lost weight, changed their lifestyle and gotten off medications. It is extremely rewarding and is a testament to [our] close-knit corporate culture.
R&I: What’s the best restaurant you’ve ever eaten at?
Some will remember the volcano eruption in Iceland in spring of 2010. I was just finishing a week of meetings in London with Lloyd’s syndicates related to our property insurance placement when the airspace in England and most of northern Europe was shut down — no airplanes in or out! Flights were ultimately canceled for the following five days. Therefore, with a few other stranded visitors like myself, we experimented and tried out new restaurants every day until we could leave. It was a very interesting time!
R&I: What is the riskiest activity you ever engaged in?
I am originally from Canada, and I played ice hockey from the time I was four years old up until quite recently. Too many surgeries sadly forced my recent retirement.
R&I: What do your friends and family think you do?
That’s a funny one … I am a CPA working in the casino industry, doing insurance and risk management, so neighbors and acquaintances think I either do tax returns or they think I’m a blackjack dealer at the casino!