From Nat CAT Covers to Active Assailant Insurance Options, Why Parametric Solutions Are Rising in the Risk Mitigation Ranks
At the beginning of 2019, the Moroccan government implemented a law to help its citizens recover from damages caused by natural catastrophes.
The country has been hit by extensive flooding and near-daily earthquakes. They’re also at risk for tsunamis.
The government was looking for a solution that would help protect its uninsured citizens in the event of a disaster by providing them with a fast-acting insurance coverage that paid based on the severity of the disaster.
“It basically means that uninsured people get some compensation when their primary residence is damaged or uninhabitable after a natural disaster,” said Simon Young, senior director at Willis Towers Watson.
To solve this problem, Young and a network of other insurers helped the government develop a parametric insurance solution that pays out based on an index, eliminating the need for a claims adjustment period.
A policy may be structured to pay out 75% of a predefined limit, say if a 100-year flood occurs within a set radius of the policyholder’s property.
“What a parametric does is it represents what we think the loss would be. We don’t have to go through the loss adjustment process to work it out, so the contract is settled on the basis of parameters that are measured independently of the loss,” said Young.
Parametric insurance solutions have typically been employed to help cover damages from natural catastrophes (Nat CATS) or bad weather. They’re becoming more widely used to cover other difficult to define risks as data becomes more widely available as well.
Though parametrics are becoming more common as traditional commercial insurance markets harden, that doesn’t mean they will supplant traditional covers.
Beyond Nat CATs, the Parametric Potential
Parametrics have long been used within the industry to provide immediate payouts for damages caused by natural catastrophes.
The system has clear advantages for the Nat CAT space, where there is a wealth of historical data insurers can use to create payment parameters for their policies.
“Most parametric solutions are for natural catastrophe risk,” Young said.
As the availability of data increases, insurers are developing more accurate parametric covers for a variety of different risks.
“There is much better and more granular data out there,” said Cole Mayer, senior vice president and senior structurer with Swiss Re Corporate Solutions. “So what that means is we can create much more robust parametric covers.”
One area where parametric covers are gaining traction is in cyber insurance. If a business experiences IT disruption or a cloud outage for a certain number of hours, insurers could use a parametric cover to determine how much economic loss that outage caused.
Supply chain disruptions are also ripe for parametric products. If a storm causes quantifiable shipping delays, for example, insurers can develop a parametric trigger that would pay both the shipper and others down the supply chain for damages.
“Supply chains have gotten incredibly complex quite quickly, such that it’s very difficult for traditional insurance,” Mayer said.
“The flexibility of a parametric cover allows us to deal with the increased complexity that our clients have in terms of their risk profiles.”
Other companies are using parametrics to develop more niche covers.
Insurtech firm Skyline Partners and Lloyd’s insurer Aegis London have developed an active assailant insurance product that would provide coverage to businesses that suffered an economic loss due to a shooting or active assailant scenario within 250 meters of their property.
Aegis and Skyline connected through the Lloyd’s Lab, which connects Insurtechs with the Lloyd’s market.
The product uses publicly available police data to identify when an active assailant event occurs. Within 48-hours of an event, the insurer notifies insureds their policy has been triggered and reaches out to confirm whether or not a loss has occurred.
If insureds experience a loss, they will receive payments in 14 days or less. This type of fast-acting payment can be critical for businesses that may need to up their security in the wake of an active shooter event or that may need to shut down while police investigate an incident.
“Once we know the location and annual revenue/ rental income, that’s all we need to price it,” said Gethin Jones, co-founder and executive director of Skyline Partners. “The cover is focused on non-physical damage/ intangible losses for the clients.”
A Hard Market Hail Mary?
Interest in parametric insurance solutions may be rising due to a number of factors. For many business owners, the COVID-19 pandemic served as a reminder that many risks companies face nowadays are intangible — that is, they do not create the same types of physical damage needed to trigger a business interruption policy.
“Where we see the most attraction to these types of covers is where you’re looking at non physical damage,” Jones said.
An increased awareness of the ways global climate change is increasing Nat CAT risk may also be driving the increased interest in parametrics. As storm frequency and intensity increases, traditional property insurers are tightening limits and pulling out of some markets entirely.
“I think one of the big drivers is climate risk,” Young said. “We’re seeing a lot of opportunities with recognition of increasing climate risk.”
Though the interest in parametrics is increasing, Jones doesn’t think they will serve as a replacement for traditional insurance products.
“Parametrics work better when it’s a complement to existing covers,” Jones said. &