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Why Parametrics Are Becoming a Vital Tool for Risk Managers

Hardening market conditions are driving increased interest in parametric products that target Nat CAT perils, but their quick payouts will make them a risk management staple for years to come.
By: | April 17, 2023

It’s easy to see why insureds have become more curious about parametrics over the past few years.

Parametrics pay out more quickly than traditional insurance products since they don’t need to wait for an adjuster to visit a site and make a determination. Instead, they pay out based on a predetermined system: If a particular event occurs, the policy pays out an agreed-upon amount. Insureds can then use that money for whatever losses they need to cover.

“We might say that at a certain intensity threshold — 80 mph wind speed, 1.25-inch hail size — we are going to pay you, the insured, a certain amount of money, and we’ll do that quickly,” said Cole Mayer, senior structurer, innovative risk solutions, North America, with Swiss Re Corporate Solutions.

“Then, once the insured receives that money, they can use the funds for any financial loss associated with the event.”

In the wake of increasingly frequent and strong natural catastrophe events, these kinds of policies are becoming a more common tool to help organizations recover. New data sources are allowing insureds to innovate in the parametrics space, creating a variety of new products. Many insureds are combining parametrics with traditional property coverages to provide increased support in the wake of natural disasters.

What’s Driving the Increase in Parametrics?

Cole Mayer, Senior Structurer, Innovative Risk Solutions, North America, Swiss Re Corporate Solutions

Over the past five years, a number of factors have converged to drive an increase in parametric products from both public and corporate entities.

“We’re at an inflection point where four or five different factors are all coming together at the same time,” Mayer said. “This is leading to a significant uptick in interest.”

Major hurricanes over the past few years — including Harvey, Maria, Irma and Ian — have caused insureds to consider how they’re managing Nat CAT risks, but many organizations are considering other perils, too, when thinking about parametric products. Hailstorms, earthquakes and tornadoes are just some events that may be a good fit for parametric products.

“There’s been some acute claims pain on the catastrophe side, which has led more organizations to think about different ways — including parametric insurance — to manage at least a portion of their Nat CAT risk,” Mayer said.

After these storms, many insureds want to recover quickly, and the flexibility of parametrics can help them do that. Organizations don’t need to wait for an on-site claims adjuster to get a payment from a parametric policy; they just need to experience a certain event and they will be paid the agreed-upon amount.

“Following a large event, there is a high demand for adjusters in a short amount of time. For that reason, it’s difficult to get those traditional claims adjusted quickly,” Mayer said. “Parametric insurance gets insureds quick liquidity when they need it, often within days of the event.”

An increase in Nat CAT events has also led some traditional property insurers to increase rates and introduce tightened terms and restrictions into their policies, driving more interest in parametrics as insureds try to cover any gaps.

“The challenge, from our clients’ perspective, is that there are certain gaps in traditional Nat CAT coverage. For example, there are deductibles, sublimits and exclusions in traditional policies,” Mayer said. “If interest [in the product] roughly doubled every year previously, I would say interest is tripling or quadrupling this year.”

Pairing Parametrics With Traditional Nat CAT Covers

As increasingly frequent Nat CAT events put stress on insurers and insureds alike, parametric insurance products have stepped up to provide quick funds that help support recovery.

A proliferation of new data on pretty much every type of natural catastrophe event has helped carriers create new parametric products. Earthquake data from Japan is allowing carriers to create more sophisticated parametric risk transfer products. Satellites are allowing insurers to measure changes in the water level after floods and design parametrics around those concerns.

“A parametric cover is really only as good as the underlying data,” Mayer said. “There’s more and better data out there than ever before, and that data has allowed us to design better covers for our clients.”

In some cases, these products are being used to cover exposures like contingent business interruption, which traditional insurance products have struggled to cover. A carrier can design a parametric that’s activated when a natural catastrophe event affects a supplier and not just an insured’s core business.

“There are certain situations where traditional insurance just really struggles to cover the risk altogether,” Mayer said. “A parametric helps bridge the gap.”

While it may make sense to use parametrics for exposures that traditional insurance has struggled to cover, many insureds are purchasing these products to support — not replace — traditional property policies.

“Parametric insurance is most effective when used as one of a number of pillars in a client’s risk management framework. Traditional insurance may be another pillar. FEMA response may be another,” Mayer said. “Parametric insurance is not replacing the other pillars entirely — rather, it gives our clients a broader suite of potential access to liquidity when they need it most.”

Mayer says that these two different types of coverage often work well together: Parametrics help insureds to get quick, flexible cash to cover any gaps, and traditional policies provide the same reliable support for major losses that they have for decades.

“If we visualize these working in tandem when a Nat CAT strikes, there is this traditional policy that covers pretty sizable limits, but you’ve got these coverage gaps and it takes time,” he explained. “Then you’ve got your parametric cover, which responds very quickly and has very broad coverage.”

Selecting a Standout Parametrics Partner

A pioneer in the parametric insurance space, Swiss Re Corporate Solutions has created a variety of products tailored to its clients’ particular risks.

The firm has been involved with parametrics since the 1990s, when it played a critical role in building a catastrophe bond market that took effect based on parametric triggers. Since then, Swiss Re has worked to evolve that system for corporates and public entities seeking parametric insurance products. It has continued to build this market over the past decade, creating new parametrics for a variety of different triggers.

“We’ve been involved from the start when these triggers were first contemplated for use in the natural catastrophe arena,” Mayer said. “We’ve been a pioneer in figuring out how these best apply to the corporate and public entity space for the past decade plus.”

Today, Swiss Re’s global team of underwriters is constantly vetting new data providers in order to increase the sophistication of its suite of parametrics and create new products for insureds. The company works with clients to ensure that they understand when a product will be triggered and that they agree on the data source underpinning the product.

“Given that our parametric covers hinge upon our data providers, we heavily vet these data providers to ensure they’re not just best-in-class from a technical perspective, but they’re reliable, they have an established history and they’re going to be there when they’re needed the most,” Mayer said.

No matter the geographic region, Swiss Re has a long track record of paying parametric claims globally for a variety of different perils. In the U.S. alone, it has dealt with the trifecta of hail, earthquake and hurricane claims.

“We’ve paid claims globally in different geographic jurisdictions with different perils,” Mayer said. “These real-life claims examples illustrate how these triggers can be very powerful for corporates and public entities.”

To learn more, visit: https://corporatesolutions.swissre.com/innovative-risk-solutions/parametric-solutions.html.

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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.