Coverage Spotlight: Parametrics

8 Questions for Robert Nusslein

After a Nat Cat, traditional insurance can fall short in its timeliness and breadth of coverage. An industry exec discusses an alternative.
By: | April 9, 2018 • 7 min read

As hurricanes, earthquakes and wildfires appear to grow more frequent, more intense, and more widespread, a clear need has developed for insurance products that can provide rapid claims payments and address business needs such as business interruption. One such product is parametric insurance. In this Q&A, Swiss Re Corporate Solutions’ Head Innovative Risk Solutions Americas, Robert Nusslein shares how these structures address gaps in traditional solutions.


R&I: What is Parametric insurance?

Robert Nusslein: Parametric policies are index-based solutions that trigger a payout as long as an event meets or exceeds certain pre-defined event parameters. These can include severity thresholds like wind speed exceedance, hurricane category, or earthquake shake intensity, as measured at specific locations where the insured has covered assets.

If the parameters are met, pre-determined payouts are typically issued within 30 days. The insured just has to provide a certification of loss stating that the loss was equal or greater to the payout amount, typically within 12 to 24 months.

R&I: What are the key differences from traditional insurance?

RN: Traditional insurance is indemnity based, and coverage is based on the policy terms and conditions such as deductibles, exclusions, limits and sub-limits. Claims are paid when losses exceed the retention held by the insured.

Parametric insurance is index-based, meaning coverage is triggered if pre-defined event parameters are met or exceeded. The payout amount is predetermined. There’s no claim adjustment process to determine the value of the loss. The parametric trigger is set in a manner that if it is triggered, it is highly likely the insured sustained actual loss. If the policy is triggered, you get paid in 30 days or less. It’s that simple. There is no dollar-based deductible or retention.

If the policy is triggered, you get paid in 30 days or less. It’s that simple.

Of course, individual transactions can have different or additional terms and conditions, depending on the unique needs of specific insureds, but this is a basic contrast between traditional insurance and parametric insurance.

R&I: What are the pros and cons of parametric coverage?

RN: The most significant and impactful benefit may be the speed of payment. Quick liquidity is critical in the aftermath of a natural disaster because it gives insureds the funds they need to begin recovery as soon as possible.

Parametric products can also fill in coverage gaps left by traditional policies. Non-physical damage business interruption is one example. Traditional insurance requires business interruption to stem directly from physical damage to an insured property. But it’s not uncommon for a facility to emerge unscathed from a natural catastrophe, while the surrounding area is badly damaged or inaccessible. There will still be losses from business interruption, but a traditional policy won’t cover it.

Payouts from parametric policies can be applied however the insured chooses, covering direct and indirect loss and any expenses associated with the event. Coverage for business interruption does not require physical damage to insured assets.

One potential downside of a parametric Nat Cat cover is basis risk. Basis risk is the difference between an insured’s loss and the parametric insurance recovery. Basis risk is present in traditional insurance policies as well in the form of deductibles or retentions, exclusions, sub-limits and unresponsive cover, such as business interruption losses must result from physical damage to insured assets not just arising from the event.

R&I: Can you expand on basis risk in parametric insurance?

RN: Basis risk was more prevalent in first generation Cat-in-the-Circle (“CIC”) or Cat-in-the-Box (“CIB”) parametric insurance products. There was a near miss factor whereby the event occurred outside of the pre-agreed geographic area or below the coverage trigger attachment point.

For example, a first generation CIC parametric policy could have the following triggers: One hundred percent of limit payout if the epicenter of a 6.5 or greater magnitude earthquake occurs within a 40-mile radius of the insured location. What if the epicenter occurs within that region but is only a 6.2 magnitude event? Or what if the magnitude is 7.0, but the epicenter is 41 miles away from the specific location?

The insured is likely going to have damage, but will recoup nothing from that policy because it just missed those triggers. That’s basis risk.

It’s not uncommon for a facility to emerge unscathed from a natural catastrophe, while the surrounding area is badly damaged or inaccessible. There will still be losses from business interruption, but a traditional policy won’t cover it.

R&I: How have these products evolved?

RN: Second generation parametric insurance products did away with geographic regions as triggers. Instead, parameters are set around reported event severity at specific locations, rather than within a pre-agreed area. So it would not matter where the epicenter of the quake is as long as the shake intensity meets a certain pre-agreed level at your facility. The same is true for hurricanes. Wind speed exceedance thresholds are set at each of the insured’s locations. Shake intensity of an earthquake or wind speeds reported at your facilities is a much better proxy for physical damage and business interruption. This is a much more flexible and nimble cover and reduces basis risk. Broker and buyer interest has skyrocketed after these innovations.


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.

Hurricane Harvey, for example, was a wind event and a significant rain event that also created a significant storm surge. All three of these contributed to massive flooding. Harvey 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 or excess rainfall could still trigger the policy.

R&I: Who are parametric policies most useful for?

RN: Really any corporation or public entity with natural catastrophe risk can supplement its traditional property insurance. Many large corporations have very high deductibles for hurricane and earthquake coverage, from 2 to 5 percent of their total insurable value, uncapped. This amounts to a very large self-insured risk. They also have a need for supplemental limits to cover uninsured or underinsured exposures, such as service interruption, extra expense or to fill in those high percent deductibles.

Parametric covers can fill in those gaps. In this way, it works best as a supplement to traditional insurance, not a replacement for it.

Many industries are buyers of parametric insurance and include manufacturing, hotel/hospitality, real estate, construction projects, public entities, energy, and utilities specifically for uninsured T&D line exposure. Public entities also have a need for quick disaster/emergency response funds, but emergency response funds unrelated to physical damage are usually excluded or take significant time for traditional insurance to respond to. Parametric earthquake and hurricane covers meet this need.

Hospitality companies with coastal properties which are hurricane-exposed can also benefit from a supplemental parametric policy, as they stand to lose significant revenue from business interruption unrelated to physical damage which is excluded from traditional insurance policies, following a Nat Cat. Area-wide devastation can result in a loss of attraction resulting in lower occupancy rates for an extended period and lost income.

R&I: What is the take-up like?

RN: After the 2017 hurricane season with Harvey, Irma, and Maria, we are seeing a massive rise in parametric hurricane insurance inquiries. 2017 was Swiss Re Corporate Solutions’ most productive year with around 50 closed parametric Nat Cat deals globally. Transactions are split roughly 50/50 between earthquake and hurricane risk. Hospitality, onshore and offshore energy, real estate, public entities and manufacturing companies have all shown interest.

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.

However, corporate transactions have been on the rise over the past 10 years. This is due in part to the evolution of parametric structures that have allowed more flexibility in designing policy triggers to cover a broader scope of risk. Both modelling firms, like RMS, and insurers have made great strides in their ability to model and price frequency and severity of Nat Cat events.

R&I: What else can a parametric structure be applied to?

RN: The most common parametric covers address natural catastrophes like earthquakes and hurricanes because there is good historical data, robust modelling and an ability to settle claims based on independent, third-party Nat Cat indices. But there is considerable interest in adapting the policies further to respond to other weather events like flooding, wild fire, snowfall, hail, excess rainfall, and tornado and temperature fluctuations.


Storm surge is the next development that we are working on right now. The ability to provide a parametric storm surge cover depends on reliable time series data, the presence of reliable tidal surge gauges, the ability to model the risk reliably and access to an independent index to settle claims post event.

But parametric insurance could also go beyond weather events. We’re focusing on industry-specific losses resulting from catastrophic events. Some unique triggers could include: reduced passenger seat miles flown for airlines, reduced occupancy rates or revenue per available room for hotels, reduced flight arrivals into a tourist destination for a variety of potential industries, reduced container traffic through a port and resulting tax revenue loss for the municipality operating the port, and reduced foot traffic through a retail center from a variety of events, which may include Nat Cats and others such as terrorism.

We are already developing solutions to meet these needs. &

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Cyber Resilience

No, Seriously. You Need a Comprehensive Cyber Incident Response Plan Before It’s Too Late.

Awareness of cyber risk is increasing, but some companies may be neglecting to prepare adequate response plans that could save them millions. 
By: | June 1, 2018 • 7 min read

To minimize the financial and reputational damage from a cyber attack, it is absolutely critical that businesses have a cyber incident response plan.

“Sadly, not all yet do,” said David Legassick, head of life sciences, tech and cyber, CNA Hardy.


In the event of a breach, a company must be able to quickly identify and contain the problem, assess the level of impact, communicate internally and externally, recover where possible any lost data or functionality needed to resume business operations and act quickly to manage potential reputational risk.

This can only be achieved with help from the right external experts and the design and practice of a well-honed internal response.

The first step a company must take, said Legassick, is to understand its cyber exposures through asset identification, classification, risk assessment and protection measures, both technological and human.

According to Raf Sanchez, international breach response manager, Beazley, cyber-response plans should be flexible and applicable to a wide range of incidents, “not just a list of consecutive steps.”

They also should bring together key stakeholders and specify end goals.

Jason J. Hogg, CEO, Aon Cyber Solutions

With bad actors becoming increasingly sophisticated and often acting in groups, attack vectors can hit companies from multiple angles simultaneously, meaning a holistic approach is essential, agreed Jason J. Hogg, CEO, Aon Cyber Solutions.

“Collaboration is key — you have to take silos down and work in a cross-functional manner.”

This means assembling a response team including individuals from IT, legal, operations, risk management, HR, finance and the board — each of whom must be well drilled in their responsibilities in the event of a breach.

“You can’t pick your players on the day of the game,” said Hogg. “Response times are critical, so speed and timing are of the essence. You should also have a very clear communication plan to keep the CEO and board of directors informed of recommended courses of action and timing expectations.”

People on the incident response team must have sufficient technical skills and access to critical third parties to be able to make decisions and move to contain incidents fast. Knowledge of the company’s data and network topology is also key, said Legassick.

“Perhaps most important of all,” he added, “is to capture in detail how, when, where and why an incident occurred so there is a feedback loop that ensures each threat makes the cyber defense stronger.”

Cyber insurance can play a key role by providing a range of experts such as forensic analysts to help manage a cyber breach quickly and effectively (as well as PR and legal help). However, the learning process should begin before a breach occurs.

Practice Makes Perfect

“Any incident response plan is only as strong as the practice that goes into it,” explained Mike Peters, vice president, IT, RIMS — who also conducts stress testing through his firm Sentinel Cyber Defense Advisors.


Unless companies have an ethical hacker or certified information security officer on board who can conduct sophisticated simulated attacks, Peters recommended they hire third-party experts to test their networks for weaknesses, remediate these issues and retest again for vulnerabilities that haven’t been patched or have newly appeared.

“You need to plan for every type of threat that’s out there,” he added.

Hogg agreed that bringing third parties in to conduct tests brings “fresh thinking, best practice and cross-pollination of learnings from testing plans across a multitude of industries and enterprises.”

“Collaboration is key — you have to take silos down and work in a cross-functional manner.” — Jason J. Hogg, CEO, Aon Cyber Solutions

Legassick added that companies should test their plans at least annually, updating procedures whenever there is a significant change in business activity, technology or location.

“As companies expand, cyber security is not always front of mind, but new operations and territories all expose a company to new risks.”

For smaller companies that might not have the resources or the expertise to develop an internal cyber response plan from whole cloth, some carriers offer their own cyber risk resources online.

Evan Fenaroli, an underwriting product manager with the Philadelphia Insurance Companies (PHLY), said his company hosts an eRiskHub, which gives PHLY clients a place to start looking for cyber event response answers.

That includes access to a pool of attorneys who can guide company executives in creating a plan.

“It’s something at the highest level that needs to be a priority,” Fenaroli said. For those just getting started, Fenaroli provided a checklist for consideration:

  • Purchase cyber insurance, read the policy and understand its notice requirements.
  • Work with an attorney to develop a cyber event response plan that you can customize to your business.
  • Identify stakeholders within the company who will own the plan and its execution.
  • Find outside forensics experts that the company can call in an emergency.
  • Identify a public relations expert who can be called in the case of an event that could be leaked to the press or otherwise become newsworthy.

“When all of these things fall into place, the outcome is far better in that there isn’t a panic,” said Fenaroli, who, like others, recommends the plan be tested at least annually.

Cyber’s Physical Threat

With the digital and physical worlds converging due to the rise of the Internet of Things, Hogg reminded companies: “You can’t just test in the virtual world — testing physical end-point security is critical too.”


How that testing is communicated to underwriters should also be a key focus, said Rich DePiero, head of cyber, North America, Swiss Re Corporate Solutions.

Don’t just report on what went well; it’s far more believable for an underwriter to hear what didn’t go well, he said.

“If I hear a client say it is perfect and then I look at some of the results of the responses to breaches last year, there is a disconnect. Help us understand what you learned and what you worked out. You want things to fail during these incident response tests, because that is how we learn,” he explained.

“Bringing in these outside firms, detailing what they learned and defining roles and responsibilities in the event of an incident is really the best practice, and we are seeing more and more companies do that.”

Support from the Board

Good cyber protection is built around a combination of process, technology, learning and people. While not every cyber incident needs to be reported to the boardroom, senior management has a key role in creating a culture of planning and risk awareness.

David Legassick, head of life sciences, tech and cyber, CNA Hardy

“Cyber is a boardroom risk. If it is not taken seriously at boardroom level, you are more than likely to suffer a network breach,” Legassick said.

However, getting board buy-in or buy-in from the C-suite is not always easy.

“C-suite executives often put off testing crisis plans as they get in the way of the day job. The irony here is obvious given how disruptive an incident can be,” said Sanchez.

“The C-suite must demonstrate its support for incident response planning and that it expects staff at all levels of the organization to play their part in recovering from serious incidents.”

“What these people need from the board is support,” said Jill Salmon, New York-based vice president, head of cyber/tech/MPL, Berkshire Hathaway Specialty Insurance.

“I don’t know that the information security folks are looking for direction from the board as much as they are looking for support from a resources standpoint and a visibility standpoint.

“They’ve got to be aware of what they need and they need to have the money to be able to build it up to that level,” she said.

Without that support, according to Legassick, failure to empower and encourage the IT team to manage cyber threats holistically through integration with the rest of the organization, particularly risk managers, becomes a common mistake.

He also warned that “blame culture” can prevent staff from escalating problems to management in a timely manner.

Collaboration and Communication

Given that cyber incident response truly is a team effort, it is therefore essential that a culture of collaboration, preparation and practice is embedded from the top down.


One of the biggest tripping points for companies — and an area that has done the most damage from a reputational perspective — is in how quickly and effectively the company communicates to the public in the aftermath of a cyber event.

Salmon said of all the cyber incident response plans she has seen, the companies that have impressed her most are those that have written mock press releases and rehearsed how they are going to respond to the media in the aftermath of an event.

“We have seen so many companies trip up in that regard,” she said. “There have been examples of companies taking too long and then not explaining why it took them so long. It’s like any other crisis — the way that you are communicating it to the public is really important.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected] Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]