Swiss Re Corporate Solutions: Weathering the storm and speeding up recovery when disaster strikesMarch 16 2017
Type climate change into a search engine and you’ll find countless articles evidencing the earth’s accelerated warming. These articles point to rising global temperature and sea levels, warming oceans, shrinking ice sheets and extreme weather events.
Dig a little deeper and the consequences of climate change indicate that global temperatures will continue to rise (largely due to greenhouse gases) – meaning longer frost-free seasons, changes in precipitation patterns, more droughts and heat waves, stronger and more intense hurricanes. Sea levels are also expected to rise by as much as four feet by 2100. These factors will influence a wide range of sectors including agriculture, construction, energy, transportation, tourism and more.
Companies turning onto parametric solutions
The World Economic Forum’s Global Risk Report 2017 placed ‘Extreme weather events’ as the number one global risk in terms of likelihood and the number two global risk in terms of impact. The latest sigma research from Swiss Re also backs up the evidence of more catastrophic events, with 198 natural catastrophes in 2015, and Asia being the hardest hit. More recent events include the devastating earthquakes in Japan and New Zealand as well as severe flooding in China and India.
Yet strangely enough, even though these extreme and unpredictable weather events are among the major climate change challenges for business operations and will likely pose business interruption and losses to assets during the coming business year, less than a quarter of overall economic losses from natural catastrophes were covered by insurance.
However, the impact of weather events on businesses is driving the popularity of parametric insurance as an alternative or a complement to traditional insurance products.
For example, mild winters/cool summers diminish consumers demand for heating/cooling and erode the profit margin for utility companies. An unexpected hard freeze could wipe out a farmer’s entire crop and livelihood. Warmer winters can result in lower attendance and increased costs from snow-making for ski resorts. Periods of abnormally hot, cold or rainy weather can inhibit progress on a construction project, resulting in missed deadlines and increased cost of work. Heavy rains can force mining pit pumps to shut down resulting in lower-grade material extraction from mining operations and flight delays can cause airlines due to increased fuel consumption, crew time and the need for additional ground staff.
What are parametric solutions?
Don’t be put off by the term ‘parametrics’. Parametric solutions are simply insurance products that depend on the measurement of an index related to a particular peril. When the index exceeds a pre-defined level, the payout is triggered. In other words, they rely on pre-agreed parameters, not the pure loss. This is why parametric insurance products are often used to help mitigate the risk portfolio of an organisation that is exposed to particular natural catastrophe perils.
While traditional insurance indemnifies the policy holder based on actual losses, parametric insurance pays out with the occurrence of a triggering event. It could be a pre-agreed measurement of wind speed, earthquake magnitude, water depth, rainfall, humidity… you name it. The point is, the hazard is used to come up with the price of the product, rather than pricing being based on the vulnerability of a particular asset. Furthermore, the payout amount is independent of the covered party’s actual financial losses. What is important however, is that the index is independently verifiable, for example a government weather bureau, and is objective, transparent, easily measured, consistent and can be reported quickly and effectively.
Parametric products may provide broader cover than traditional insurance. They can be used to drop down and cover lower layers of loss not covered by traditional insurance once the pre-agreed event parameters have been met. Also, parametric products can be structured as multi-year contracts, which may be difficult to obtain in the traditional insurance market.
The benefits of parametric solutions
Parametric solutions can provide coverage that is not possible under traditional insurance and can bridge some of the gaps in conventional policies. With parametric products, a structure can be put in place that will provide a quick, pre-agreed pay out without any investigation into the extent of the loss. Parametric insurance removes all subjectivity from the process, giving the customer certainty and speedy access to liquidity.
Parametric products can certainly bring claims certainty, which makes them particularly useful in managing earnings volatility for business interruption type coverage, especially for wide area damage. Payments can be made very quickly and the proceeds from the parametric insurance can be used where it is needed the most.
Parametric solutions can also make risk transfer available where the traditional markets offer limited solutions. An expedited cash flow following a damaging event has often been a decisive factor for buyers of a parametric cover.
Should you be considering parametric solutions?
If your organisation faces some or all of the following challenges, parametric solutions could be worth considering:
- Do you have assets that are in locations that have the potential to be impacted by natural catastrophe or extreme weather events?
- Does your supply chain have the potential to be impacted by natural catastrophe or extreme weather events?
- Would you need cash flow immediately after a damaging event?
- Do you foresee difficulties in relying on accurate post-loss damage assessment?
- Do your assets extend beyond property?
- Do you want cover that is difficult to obtain in the traditional market?
- Do you have limitations in providing underwriting information?
- Do you need to tap non-traditional sources, such as capital market investors, to get capacity?
- Do you have an asset with no historic data, loss or hazard information, or with insufficient means to insure proper post-loss damage assessment?
- Do you need to find an alternative to indemnity-based products due to traditional capacity being limited?
Parametrics in action
Here are some examples of how Swiss Re Corporate Solutions has used parametric solutions to help corporations across the globe:
- Power distribution in the Philippines is heavily exposed to tropical cyclones. However, insurers typically exclude assets such as antennas and cables from their coverage. To this end, Swiss Re Corporate Solutions recently structured a parametric solution for a power supplier based in the Philippines, making it the first insurance company to do so.
- A salt mine in northern Australia is very exposed to cyclonic activity, and the owner’s traditional Industrial Special Risks policy suffered quite a few losses over several years. Traditional insurance markets withdrew their capacity, leaving a vital component of the facility – its salt ponds – completely uncovered. A parametric solution was devised to fill this gap.
- Swiss Re Corporate Solutions’ Vita Capital transaction provided cover against mortality risks by using triggers based on mortality indices, a sudden spike in death rates, or even the declaration of a pandemic above a pre-specified level by an independent organisation, such as the World Health Organisation.
- American universities facing earthquake or windstorm perils were provided with parametric solutions utilising the postcodes of each campus to gauge their respective exposures. They chose parametric solutions due to the cost-efficiency they provided because of the lower limits they could select.
Christian is Global Head of Innovative Solutions responsible for marketing, structuring and underwriting of innovative and custom-made risk and capital management solutions for corporate clients. Examples of non-standard product offerings include tailor-made re/insurance, captive solutions, parametric covers, structured credit, run-off and many others. Christian worked for Swiss Re in London, Hong Kong, Singapore, the US and Zurich. Before joining Swiss Re in 1997, Christian worked for Credit Suisse in corporate lending and with Reinsurance Finance Consultants, a joint-venture between Swiss Re, Credit Suisse and Winterthur Reinsurance, in their financial engineering unit. He holds an MBA from the University of Zurich, and a CPCU from the Insurance Institute of America.
To find out more visit https://corporatesolutions.swissre.com/innovative_risk/parametric/
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