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When Disaster Strikes, Parametrics Speed Recovery

Parametric insurance is a critical tool to have in the event of a natural catastrophe.
By: | November 2, 2016 • 6 min read

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When natural catastrophes bring communities to a standstill, they need to start rebuilding and recovering fast to return life to normal. But only 30 percent of the total costs of natural disasters around the globe are insured. Who pays for the other 70 percent?

Overwhelmingly, the burden is borne by governments, who pass along the expense to their citizens by raising taxes, reallocating other budgetary items to repair and recovery efforts, or posting debt post-event.

“We argue that these are really inefficient ways to pay for things that we know are going to happen,” said Alex Kaplan, Senior Vice President, Global Partnerships at Swiss Re.

Alex Kaplan

Alex Kaplan, Senior Vice President, Global Partnerships, Swiss Re

Even when insurance does kick in after a catastrophe, it takes time to assess the damage, value the loss, process the claim and deliver payments. That’s time that communities don’t have when they’re rebuilding.

Coverage gaps present another obstacle. There will inevitably be losses not covered by traditional insurance, and not reimbursed by the Federal Emergency Management Agency. Overtime pay for emergency personnel, for example, is not an insured loss. Nor is the intangible loss of tax revenue that can plague a city for years after natural disaster forces residents out.

“Look at New Orleans. Eleven years after Katrina, they’re still at 85 percent of their pre-Katrina population. That’s not just a loss of individuals and culture; it’s a loss of the tax base. It translates into lesser sales tax, lesser property tax, and lesser lodging taxes. All of a sudden, all of the things the city was attempting to do in its long-term planning can’t happen the way they were designed to,” Kaplan said.

The public sector is also challenged by a lack of liquidity. Governments don’t have cash on hand to spare to fill in these gaps. To rebuild quickly and efficiently, they need payments fast.

“If we can create a mechanism that not only compensates governments for economic loss, but does it exceptionally fast – very differently from how insurance typically operates —it can be incredibly valuable for recovery,” Kaplan said.

Enter parametric insurance.

The Power of Parametric

“Parametric or index-based insurance means that the policy is built around and triggered by characteristics of an event, rather than characteristics of a loss,” said Megan Linkin, Ph.D., CCM, Natural Hazards Expert and Vice President, Global Partnerships, Swiss Re.

Data from third party sources, like the National Hurricane Center or U.S. Geological Survey, would determine what those characteristics are. If a hurricane or an earthquake meets those thresholds for severity, payout from the policy begins automatically.

“One major benefit is that, because you’re relying on third party data and event criteria, the whole claims settlement process can be avoided. No one has to evaluate your losses to initiate payment,” Linkin said.

“That’s the novelty of it — to have this massive event and not have to send in an army of claims adjusters. If the trigger is met, the money flows,” Kaplan said.

Because parametric coverage is event-dependent, its structure is flexible. In order to fit parametric insurance into their budget, insureds can adjust the triggering criteria in the policy, deciding for themselves the level of intensity that will trigger a payout.

Insureds must still provide a proof of loss as a result of a triggering loss. Designating an event as the policy trigger allows payments to begin immediately, but a threshold loss, as determined on a contract-by-contract basis, remains a criterion of the policy.

Parametric coverage can be a lifesaver for communities vulnerable to severe storms and earthquakes that perhaps lack the resources to purchase high limits of traditional insurance.

The CCRIF SPC— an insurance pool comprising several Caribbean countries (formerly the Caribbean Catastrophic Risk and Insurance Facility) — is one mechanism through which those governments can purchase parametric earthquake and hurricane policies collectively. CCRIF has been critical in helping those nations recover from devastating hurricanes and earthquakes.

After an earthquake rocked Haiti in January, 2010, payments from a parametric earthquake policy purchased through CCRIF made up 50 percent of every dollar the government received within the first 10 weeks. Hurricane Matthew provides another recent example.

“Matthew triggered parametric coverage placed through CCRIF, and the facility is in the process of making a $20 million payment to the government of Haiti as a result,” Kaplan said. “Haiti will receive assistance from every corner of the globe to help them recover, and that might come in the form of tents, blankets, water and housing units. But sometimes what you really need is the flexibility of cash, because you don’t always know what you’ll need.”

Coverage for Corporations

SwissRe_SponsoredContentParametric insurance also holds benefits for private corporations as a backstop against gaps in traditional insurance or unforeseen losses.

As the economy becomes more globalized, supply chains become more far-flung and complex. If an earthquake knocks out a supplier in Japan, for example, a quake-centered parametric policy could act as a form of contingent business interruption when traditional insurance limits are maxed.

The 2011 Thailand floods affected a number of suppliers for Japanese car companies and U.S.-based technology companies like Apple. These corporations may not be able to take out insurance policies on the manufacturing facilities they rely on overseas, but a parametric policy that responds to natural disasters that disrupt those facilities could protect them from business interruption exposure.

“You may have a lot of holes in traditional policies, a lot of exclusions or sub-limits, and some losses that you just can’t foresee,” Kaplan said. “The parametric structure effectively acts as a safety net to catch those losses that fall through.”

Parametric policies can be built around a variety of natural events, from earthquake and hurricane to heavy rainfall and flooding. Swiss Re’s Index-Based Named Windstorm Insurance (STORM), as its name suggests, centers on locations exposed to high wind speeds.

Each STORM contract is customized to the needs of the buyer. Rather than offering an “off the shelf” product based on a wind measurement from a single point, Swiss Re’s experts assess the client’s exposure at the geographical expanse of the hurricane’s wind field. This allows a more granular view of their exposure. Clients can then carve out their highest risk element and move them to a parametric policy with coverage tailored to that exposure.

“We have the ability at a very granular level to determine the wind speed at a given location, whether it’s one location or a thousand. We can then assess what kind of damage can be anticipated on the ground. The index, based on aggregated exposed asset values in target zip codes, can be calculated in less than 10 days, and the payout met in about the same amount of time,” Kaplan said.

Parametric products can complement traditional insurance policies to provide additional limits when they’re needed most. After a natural catastrophe, both public and private entities need funds fast, and they may not be able to rely on their property and business interruption policies — or government assistance — to cover all the losses.

Parametrics at a Glance

  1. Parametric insurance is triggered by an event that meets certain conditions — not by a loss.
  2. After a natural disaster, parametric policies fill the gap between insured losses and FEMA reimbursement.
  3. Corporations can also purchase parametric policies as a backstop to fill coverage gaps.
  4. After a triggering event, payouts are automatic and insureds can use the funds however best suits their needs.

To learn more about Swiss Re Corporate Solutions, visit http://www.swissre.com/corporate_solutions/solutions/parametric_products/.

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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.




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