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

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.


That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.


Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]