Sponsored: Swiss Re Corporate Solutions

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


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/.



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 Focus: Cyber

Expanding Cyber BI

Cyber business interruption insurance is a thriving market, but growth carries the threat of a mega-loss. 
By: | March 5, 2018 • 7 min read

Lingering hopes that large-scale cyber attack might be a once-in-a-lifetime event were dashed last year. The four-day WannaCry ransomware strike in May across 150 countries targeted more than 300,000 computers running Microsoft Windows. A month later, NotPetya hit multinationals ranging from Danish shipping firm Maersk to pharmaceutical giant Merck.


Maersk’s chairman, Jim Hagemann Snabe, revealed at this year’s Davos summit that NotPetya shut down most of the group’s network. While it was replacing 45,000 PCs and 4,000 servers, freight transactions had to be completed manually. The combined cost of business interruption and rebuilding the system was up to $300 million.

Merck’s CFO Robert Davis told investors that its NotPetya bill included $135 million in lost sales plus $175 million in additional costs. Fellow victims FedEx and French construction group Saint Gobain reported similar financial hits from lost business and clean-up costs.

The fast-expanding world of cryptocurrencies is also increasingly targeted. Echoes of the 2014 hack that triggered the collapse of Bitcoin exchange Mt. Gox emerged this January when Japanese cryptocurrency exchange Coincheck pledged to repay customers $500 million stolen by hackers in a cyber heist.

The size and scope of last summer’s attacks accelerated discussions on both sides of the Atlantic, between risk managers and brokers seeking more comprehensive cyber business interruption insurance products.

It also recently persuaded Pool Re, the UK’s terrorism reinsurance pool set up 25 years ago after bomb attacks in London’s financial quarter, to announce that from April its cover will extend to include material damage and direct BI resulting from acts of terrorism using a cyber trigger.

“The threat from a cyber attack is evident, and businesses have become increasingly concerned about the extensive repercussions these types of attacks could have on them,” said Pool Re’s chief, Julian Enoizi. “This was a clear gap in our coverage which left businesses potentially exposed.”

Shifting Focus

Development of cyber BI insurance to date reveals something of a transatlantic divide, said Hans Allnutt, head of cyber and data risk at international law firm DAC Beachcroft. The first U.S. mainstream cyber insurance products were a response to California’s data security and breach notification legislation in 2003.

Jimaan Sané, technology underwriter, Beazley

Of more recent vintage, Europe’s first cyber policies’ wordings initially reflected U.S. wordings, with the focus on data breaches. “So underwriters had to innovate and push hard on other areas of cyber cover, particularly BI and cyber crimes such as ransomware demands and distributed denial of service attacks,” said Allnut.

“Europe now has regulation coming up this May in the form of the General Data Protection Regulation across the EU, so the focus has essentially come full circle.”

Cyber insurance policies also provide a degree of cover for BI resulting from one of three main triggers, said Jimaan Sané, technology underwriter for specialist insurer Beazley. “First is the malicious-type trigger, where the system goes down or an outage results directly from a hack.

“Second is any incident involving negligence — the so-called ‘fat finger’ — where human or operational error causes a loss or there has been failure to upgrade or maintain the system. Third is any broader unplanned outage that hits either the company or anyone on which it relies, such as a service provider.”

The importance of cyber BI covering negligent acts in addition to phishing and social engineering attacks was underlined by last May’s IT meltdown suffered by airline BA.

This was triggered by a technician who switched off and then reconnected the power supply to BA’s data center, physically damaging servers and distribution panels.

Compensating delayed passengers cost the company around $80 million, although the bill fell short of the $461 million operational error loss suffered by Knight Capital in 2012, which pushed it close to bankruptcy and decimated its share price.

Mistaken Assumption

Awareness of potentially huge BI losses resulting from cyber attack was heightened by well-publicized hacks suffered by retailers such as Target and Home Depot in late 2013 and 2014, said Matt Kletzli, SVP and head of management liability at Victor O. Schinnerer & Company.


However, the incidents didn’t initially alarm smaller, less high-profile businesses, which assumed they wouldn’t be similarly targeted.

“But perpetrators employing bots and ransomware set out to expose any firms with weaknesses in their system,” he added.

“Suddenly, smaller firms found that even when they weren’t themselves targeted, many of those around them had fallen victim to attacks. Awareness started to lift, as the focus moved from large, headline-grabbing attacks to more everyday incidents.”

Publications such as the Director’s Handbook of Cyber-Risk Oversight, issued by the National Association of Corporate Directors and the Internet Security Alliance fixed the issue firmly on boardroom agendas.

“What’s possibly of greater concern is the sheer number of different businesses that can be affected by a single cyber attack and the cost of getting them up and running again quickly.” — Jimaan Sané, technology underwriter, Beazley

Reformed ex-hackers were recruited to offer board members their insights into the most vulnerable points across the company’s systems — in much the same way as forger-turned-security-expert Frank Abagnale Jr., subject of the Spielberg biopic “Catch Me If You Can.”

There also has been an increasing focus on systemic risk related to cyber attacks. Allnutt cites “Business Blackout,” a July 2015 study by Lloyd’s of London and the Cambridge University’s Centre for Risk Studies.

This detailed analysis of what could result from a major cyber attack on America’s power grid predicted a cost to the U.S. economy of hundreds of billions and claims to the insurance industry totalling upwards of $21.4 billion.

Lloyd’s described the scenario as both “technologically possible” and “improbable.” Three years on, however, it appears less fanciful.

In January, the head of the UK’s National Cyber Security Centre, Ciaran Martin, said the UK had been fortunate in so far averting a ‘category one’ attack. A C1 would shut down the financial services sector on which the country relies heavily and other vital infrastructure. It was a case of “when, not if” such an assault would be launched, he warned.

AI: Friend or Foe?

Despite daunting potential financial losses, pioneers of cyber BI insurance such as Beazley, Zurich, AIG and Chubb now see new competitors in the market. Capacity is growing steadily, said Allnutt.

“Not only is cyber insurance a new product, it also offers a new source of premium revenue so there is considerable appetite for taking it on,” he added. “However, whilst most insurers are comfortable with the liability aspects of cyber risk; not all insurers are covering loss of income.”

Matt Kletzli, SVP and head of management liability, Victor O. Schinnerer & Company

Kletzli added that available products include several well-written, broad cyber coverages that take into account all types of potential cyber attack and don’t attempt to limit cover by applying a narrow definition of BI loss.

“It’s a rapidly-evolving coverage — and needs to be — in order to keep up with changing circumstances,” he said.

The good news, according to a Fitch report, is that the cyber loss ratio has been reduced to 45 percent as more companies buy cover and the market continues to expand, bringing down the size of the average loss.

“The bad news is that at cyber events, talk is regularly turning to ‘what will be the Hurricane Katrina-type event’ for the cyber market?” said Kletzli.

“What’s worse is that with hurricane losses, underwriters know which regions are most at risk, whereas cyber is a global risk and insurers potentially face huge aggregation.”


Nor is the advent of robotics and artificial intelligence (AI) necessarily cause for optimism. As Allnutt noted, while AI can potentially be used to decode malware, by the same token sophisticated criminals can employ it to develop new malware and escalate the ‘computer versus computer’ battle.

“The trend towards greater automation of business means that we can expect more incidents involving loss of income,” said Sané. “What’s possibly of greater concern is the sheer number of different businesses that can be affected by a single cyber attack and the cost of getting them up and running again quickly.

“We’re likely to see a growing number of attacks where the aim is to cause disruption, rather than demand a ransom.

“The paradox of cyber BI is that the more sophisticated your organization and the more it embraces automation, the bigger the potential impact when an outage does occur. Those old-fashioned businesses still reliant on traditional processes generally aren’t affected as much and incur smaller losses.” &

Graham Buck is editor of gtnews.com. He can be reached at riskletters.com.