The 2021 Hurricane Season Is Fast Approaching. Here’s What Businesses Should Know About the Parametric Solutions Designed to Mitigate Risk
Hurricane season lasts from May to November, though it’s never too early to start planning for the financial exposures of an upcoming season. Increased development, asset valuation and climate change have contributed to the physical and financial impacts of hurricanes, with 2020 leaving behind 30 named storms and almost $47 billion in damages.
That puts 2020 on the books as the seventh costliest season in recent history.
Understanding hurricane vulnerabilities, not only in the immediate aftermath but also in the long-term, enables businesses to gain a holistic view of their financial risks in the event of a storm.
“As we pivot into 2021, we anticipate this will be a very crucial time for economic recovery,” said Scott Carpinteri, Senior Vice President, Innovative Risk Solutions Americas at Swiss Re Corporate Solutions.
“Organizations that suffered through 2020 due to economic setbacks that stemmed from the COVID-19 pandemic are looking to get back to normal and get back on their feet. If another series of hurricane events play out this year, it could be a huge financial impediment to the long-term sustainability of any organization,” he said.
That is why it’s crucial for every business, even those not directly in the path of a storm, to review the risks associated with hurricane season. Storms can become strong and change course in the blink of an eye, and the best risk mitigation strategy to handle such unknowns is reviewing coverage ahead of loss.
Parametric solutions are one way of doing just that.
“Parametric solutions allow a buyer to receive funds quickly to address financial disruption not necessarily linked to a physical loss caused by a storm,” said Megan Linkin, Senior Parametric Nat Cat Underwriter at Swiss Re Corporate Solutions.
Here are the top lessons learned from the 2020 hurricane season and how parametric solutions are stepping in to help curb the financial impact of growing storms.
What 2020 Has Taught Us
“The number one lesson we learned — conditions and expectations can rapidly change,” said Linkin.
In 2020, Linkin and her team tracked the rapid rate at which a storm could change course or grow in scale. She said that many hurricanes, as they approached the coast, went through what is known as rapid intensification.
“They would become very strong very quickly,” she explained. “Because this was happening near the coast, that meant there was a much shorter window of time for emergency managers, governments, businesses and individuals to prepare for the event.”
Tropical storms would become hurricanes. High storm surges led to heftier damages to property and greater threats to safety. Emergency managers had to adjust their expectations accordingly as updates came in.
“It became a dance,” said Carpinteri. “We would watch forecasts of these storms, trying to figure out where they might land. And just because a particular hurricane didn’t hit you, it didn’t mean another one couldn’t. The rate at which these storms changed direction would happen that fast.”
That, he said, was another vital lesson learned in 2020. As hurricanes rapidly intensified, the ability to predict where they might land became a much harder practice.
“It further showed the need for having business continuity plans in place,” Carpinteri added. “Because now a storm could interrupt, not necessarily your business, but the roads leading to it. The supply chain could be disrupted from a storm, further complicating the business’s functions.”
Parametric Solutions to Fill the Gap
From mild winters to earthquakes to hurricanes and regardless of the type of business, natural catastrophe can strike anywhere, impacting cash flow and the bottom line. There are, of course, safeguards in place when a property is damaged, whether that be in the property policy itself or through business interruption coverage.
But what happens in the event a bridge is collapsed or a road is out of service? How does a business manage those types of interruptions without suffering significant financial loss?
Enter parametric solutions.
“The world is getting more and more complex,” Carpinteri said. “Added expenses are becoming more costly and complicated. Organizations have become very specialized in the services they offer, and so business continuity plans don’t always come back to just keeping the physical building in operation. There’s larger supply chains to think about, external damages that can lead to interruption.”
For example, he said, say there is a resort hotel that received very little physical damage when a hurricane hits the coast, but the surrounding community is heavily impacted. The bridge leading to this community is decimated. Additionally, the beaches are filled with debris and the local airport is out of service, all of which severely limits tourists and visitors for at least a year.
How does that hotel manage that kind of loss in revenue?
“There’s a protection gap there that parametric solutions can fill,” Linkin said. “They play a role in getting funds to the organization immediately in order to address those financial disruptions not connected to a physical asset.”
Parametric solutions are built for organizations to transfer some of their overall risk to the insurance industry and build back after the storm. Funds are often seen as a way to increase asset resiliency moving forward.
“Ultimately, these funds can be used to address any direct or indirect cost that is incurred due to the impact of a hurricane — or other covered natural catastrophe,” Linkin added.
Stressing the Need for Parametric Experts
When it comes down to investing in a parametric insurance that fits a specific organization, it’s important to remember that partnering with experts in the space can lead to a custom fit.
That’s why Swiss Re Corporate Solutions has designed its parametric protection with simple trigger and payout mechanisms to speed up the claims payment process. The goal has always been and will always be to get clients back up and running whenever disaster strikes.
“Swiss Re has been in the parametric space and actively involved in designing and offering parametric solutions since the concept was borne,” Linkin said. The team has carved out a space for themselves and propelled Swiss Re Corporate Solutions forward as a leader in the parametric market space ever since.
“If there are measurable events that are correlated to the financial cost to organizations, we feel it necessary that we should be able to quantify and produce an insurance product based on those needs,” Carpinteri said.
For hurricanes, that means reviewing wind speeds. When it comes to other catastrophic events, that could mean reviewing shaking during an earthquake or measuring hailstone size during a hailstorm. These measurable items give the parametric team an idea of how to quantify losses based on concrete, measurable events.
Swiss Re’s efforts don’t stop there: “We’re constantly thinking about how we can improve and how we can design the next generation of products to meet our clients’ needs,” Linkin said.
“That’s where our expertise lies,” Carpinteri said. “We spend our days talking to brokers and clients about parametrics in order to show all the available risk transfer tools they have access to, as well as learning what they might still need. The ultimate success is making sure they know what’s possible.”
To learn more, visit: corporatesolutions.swissre.com/parametric.
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.