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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

Risk Report: Entertainment

On With the Show

Entertainment companies are attractive and vulnerable targets for cyber criminals.
By: | December 14, 2017 • 7 min read

Recent hacks on the likes of Sony, HBO and Netflix highlight the vulnerability entertainment companies have to cyber attack. The threat can take many forms, from the destruction or early release of stolen content to the sabotage of broadcast, production or streaming feeds.

Brian Taliaferro, entertainment and hospitality specialist, JLT Specialty USA

“Cyber attacks are becoming the biggest emerging threat for entertainment companies, bringing risk to reputations, bottom lines and the product itself,” said Brian Taliaferro, entertainment and hospitality specialist, JLT Specialty USA.

For most entertainment firms, intellectual property (IP) is the crown jewel that must be protected at all costs, though risk profiles vary by sub-sector. Maintaining an uninterrupted service may be the biggest single concern for live broadcasters and online streaming providers, for example.

In the case of Sony, North Korea was allegedly behind the leak of stolen private information in 2014 in response to a film casting leader Kim Jong Un in what it considered an unfavorable light.

This year, Netflix and HBO both faced pre-broadcast leaks of popular TV series, and Netflix last year also had its systems interrupted by a hack.

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Online video game platforms are also ripe for attack, with Steam admitting that 77,000 of its gamer accounts are hacked every month.

The list goes on and will only get more extensive over time.

Regardless of the platform, any cyber attack that prevents companies from producing or distributing content as planned can have huge financial implications, particularly when it comes to major releases and marquee content, which can make or break a financial year.

“People and culture are the biggest challenges but also the keys to success.” — David Legassick, head of life science, technology and cyber, CNA Hardy

The bottom line, said David Legassick, head of life science, technology and cyber, CNA Hardy, is that these firms have a combination of both assets and business models that are inherently open to attack.

“Vulnerabilities exist at every point in the supply chain because it’s all tech-dependent,” he said, adding that projects often run on public schedules, allowing criminals to time their attacks to maximize impact.

“The combination of IP, revenue and reputation risk make entertainment a hot sector for cyber criminals.”

Touch Point Vulnerabilities

Film, TV, literary and music projects invariably involve numerous collaborators and third-party vendors at every stage, from development to distribution. This creates multiple touchpoints through which hackers could gain access to materials or systems.

According to Kyle Bryant, regional cyber manager, Europe, for Chubb, there is nothing unique about the type of attack media companies suffer — usually non-targeted ransomware attacks with a demand built in.

“However, once inside, the hackers often have a goldmine to exploit,” he said.

He added targeted attacks can be more damaging, however. Some sophisticated types of ransomware attack, for example, are tailored to detect certain file types to extract or destroy.

“NotPetya was designed to be non-recoverable. For a media company, it could be critical if intellectual property is destroyed.”

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As entertainment companies have large consumer bases, they are also attractive targets for ideological attackers wishing to spread messages by hijacking websites and other media, he added.

They also have vast quantities of personal information on cast and crew, including celebrities, which may also have monetary value for hackers.

“It is essential to identify the most critical information assets and then put a value on them. After that, it is all about putting protection in place that matches the level of concern,” Bryant advised.

As with any cyber risk, humans are almost always the biggest point of vulnerability, so training staff to identify risks such as suspicious messages and phishing scams, as well as security and crisis response protocols, is essential. Sources also agree it is vital for entertainment companies to give responsibility for cyber security to a C-suite executive.

“People and culture are the biggest challenges but also the keys to success,” said Legassick.

“Managing the cyber threat is not a job that can just be left to the IT team. It must come from the top and pervade every aspect of how a company works.”

David Legassick, head of life science, technology and cyber, CNA Hardy

Joe DePaul, head of cyber, North America, Willis Towers Watson, suggested entertainment companies adopt a “holistic, integrated approach to cyber risk management,” which includes clearly defining processes and conducting background checks on the cyber security of any third party that touches the IP.

This includes establishing that the third parties understand the importance of the media they are handling and have appropriate physical and non-physical security at least equal to the IP owner in place. These requirements should also be written into contracts with vendors, he added.

“The touchpoints in creating content used to be much more open and collaborative, but following the events of the last few years, entertainment firms have rapidly introduced cyber and physical security to create a more secure environment,” said Ryan Griffin, cyber specialist, JLT Specialty USA.

“These companies are dealing with all the issues large data aggregators have dealt with for years. Some use secure third-party vendors, while others build their own infrastructure. Those who do business securely and avoid leaks can gain an advantage over their competitors.”

Quantification Elusive

If IP is leaked or destroyed, there is little that can be done to reverse the damage. Insurance can cushion the financial blow, though full recovery is very difficult to achieve in the entertainment space, as quantifying the financial impact is so speculative.

As Bill Boeck, insurance and claims counsel, Lockton, pointed out, there are only “a handful of underwriters in the world that would even consider writing this risk,” and sources agreed that even entertainment firms themselves struggle to put a monetary value on this type of exposure.

“The actual value of the IP taken isn’t generally going to be covered unless you have negotiated a bespoke policy,” said Boeck.

“If you’re in season five of a series with a track record and associated income stream, that is much easier, but putting a value on a new script, series or novel is difficult.”

Companies for whom live feeds or streaming are the primary source of revenue may find it easier to recoup losses. Determining the cost of a hack of that sort of service is a more easily quantifiable business interruption loss based on minutes, hours, ad dollars and subscription fees.

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Brokers and insurers agree that while the cyber insurance market has not to date developed specific entertainment products, underwriters are open for negotiation when it comes to covering IP. The ball is therefore in the insured’s court to bring the most accurate projections to the table.

“Clients can get out of the insurance market what they bring to the equation. If you identify your concerns and what you want to get from insurance, the market will respond,” said Bryant.And according to Griffin, entertainment companies are working with their brokers to improve forecasts for the impact of interruptions and IP hacks and to proactively agree to terms with underwriters in advance.

However, Legassick noted that many entertainment firms still add cyber extensions to their standard property policies to cover non-physical damage business interruption, and many may not have the extent of coverage they need.

Crisis Response

Having a well-planned and practiced crisis response plan is critical to minimizing financial and reputational costs. This should involve the input of experienced, specialist third parties, as well as numerous internal departments.

Ryan Griffin, cyber specialist, JLT Specialty USA

“The more business operation leaders can get involved the better,” said Griffin.

Given the entertainment industry’s highly public nature, “it is critically important that the victim of a hack brings in a PR firm to communicate statements both outside and within the organization,” said Boeck, while DePaul added that given that most cyber attacks are not detected for 200-plus days, bringing in a forensic investigator to determine what happened is also essential.

Indeed, said Griffin, knowing who perpetrated the attack could help bring the event to a swifter and cheaper conclusion.

“Is it a nation state upset about the way it’s been portrayed or criminals after a quick buck? Understanding your enemy’s motivation is important in mitigating the damage.”

Some hackers, he noted, have in the past lived up to their word and released encryption keys to unlock stolen data if ransoms are paid. Inevitably, entertainment firms won’t always get so lucky.

Given the potentially catastrophic stakes, it is little surprise these firms are now waking up to the need for robust crisis plans and Fort Knox-level security for valuable projects going forward. &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected]