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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.




Swiss Re Corporate Solutions offers innovative, high-quality insurance capacity to mid-sized and large multinational corporations and public entities across the globe.

More from Risk & Insurance

More from Risk & Insurance

2017 RIMS

RIMS Conference Opens in Birthplace of Insurance in US

Carriers continue their vital role of helping insureds mitigate risks and promote safety.
By: | April 21, 2017 • 4 min read

As RIMS begins its annual conference in Philadelphia, it’s worth remembering that the City of Brotherly Love is not just the birthplace of liberty, but it is the birthplace of insurance in the United States as well.

In 1751, Benjamin Franklin and members of Philadelphia’s first volunteer fire brigade conceived of an insurance company, eventually named The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire.

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For the first time in America — but certainly not for the last time – insurers became instrumental in protecting businesses by requiring safety inspections before agreeing to issue policies.

“That included fire brigades and the knowledge that a brick house was less susceptible to fire than a wood house,” said Martin Frappolli, director of knowledge resources at The Institutes.

It also included good hygiene habits, such as not placing oily rags next to a furnace and having a trap door to the roof to help the fire brigade fight roof and chimney blazes.

Businesses with high risk of fire, such as apothecary shops and brewers, were either denied policies or insured at significantly higher rates, according to the Independence Hall Association.

Robert Hartwig, co-director, Center of Risk and Uncertainty Management at the Darla Moore School of Business, University of South Carolina

Before that, fire was generally “not considered an insurable risk because it was so common and so destructive,” Frappolli said.

“Over the years, we have developed a lot of really good hygiene habits regarding the risk of fire and a lot of those were prompted by the insurance considerations,” he said. “There are parallels in a lot of other areas.”

Insurance companies were instrumental in the creation of Underwriters Laboratories (UL), which helps create standards for electrical devices, and the Insurance Institute for Highway Safety, which works to improve the safety of vehicles and highways, said Robert Hartwig, co-director, Center of Risk and Uncertainty Management at the Darla Moore School of Business at the University of South Carolina and former president of the Insurance Information Institute.

Insurers have also been active through the years in strengthening building codes and promoting wiser land use and zoning rules, he said.

When shipping was the predominant mode of commercial transport, insurers were active in ports, making sure vessels were seaworthy, captains were experienced and cargoes were stored safety, particularly since it was the common, but hazardous, practice to transport oil in barrels, Hartwig said.

Some underwriters refused to insure ships that carried oil, he said.

When commercial enterprises engaged in hazardous activities and were charged more for insurance, “insurers were sending a message about risk,” he said.

In the industrial area, the common risk of boiler and machinery explosions led insurers to insist on inspections. “The idea was to prevent an accident from occurring,” Hartwig said. Insurers of the day – and some like FM Global and Hartford Steam Boiler continue to exist today — “took a very active and early role in prevention and risk management.”

Whenever insurance gets involved in business, the emphasis on safety, loss control and risk mitigation takes on a higher priority, Frappolli said.

“It’s a really good example of how consideration for insurance has driven the nature of what needs to be insured and leads to better and safer habits,” he said.

Workers’ compensation insurance prompted the same response, he said. When workers’ compensation laws were passed in the early 1900s, employee injuries were frequent and costly, especially in factories and for other physical types of work.

Because insurers wanted to reduce losses and employers wanted reduced insurance premiums, safety procedures were introduced.

“Employers knew insurance would cost a lot more if they didn’t do the things necessary to reduce employee injury,” Frappolli said.

Martin J. Frappolli, senior director of knowledge resources, The Institutes

Cyber risk, he said, is another example where insurance companies are helping employers reduce their risk of loss by increasing cyber hygiene.

Cyber risk is immature now, Frappolli said, but it’s similar in some ways to boiler and machinery explosions. “That was once horribly damaging, unpredictable and expensive,” he said. “With prompting from risk management and insurance, people were educated about it and learned how to mitigate that risk.

“Insurance is just one tool in the toolbox. A true risk manager appreciates and cares about mitigating the risk and not just securing a lower insurance rate.

“Someone looking at managing risk for the long term will take a longer view, and as a byproduct, that will lead to lower insurance rates.”

Whenever technology has evolved, Hartwig said, insurance has been instrumental in increasing safety, whether it was when railroads eclipsed sailing ships for commerce, or when trucking and aviation took precedence.

The risks of terrorism and cyber attacks have led insurance companies and brokers to partner with outside companies with expertise in prevention and reduction of potential losses, he said. That knowledge is transmitted to insureds, who are provided insurance coverage that results in financial resources even when the risk management methods fail to prevent a cyber attack.

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This year’s RIMS Conference in Philadelphia shares with risk managers much of the knowledge that has been developed on so many critical exposures. Interestingly enough, the opening reception is at The Franklin Institute, which celebrates some of Ben Franklin’s innovations.

But in-depth sessions on a variety of industry sectors as well as presentations on emerging risks, cyber risk management, risk finance, technology and claims management, as well as other issues of concern help risk managers prepare their organizations to face continuing disruption, and take advantage of successful mitigation techniques.

“This is just the next iteration of the insurance world,” Hartwig said. “The insurance industry constantly reinvents itself. It is always on the cutting edge of insuring new and different risks and that will never change.” &

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]