How fast parametric policy payments can improve recovery from a major Natural Catastrophe
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Although parametric or index-based solutions have been around for the last 20 years, they’ve recently become more popular amongst corporate and public entities for covering natural perils. Since they pay out pre-agreed amounts when predefined conditions are met, Risk Managers and CFOs use parametric or index-based solutions to cover gaps in their traditional insurance programs or as carve-out covers. And customers particularly love one key benefit of parametric solutions: the fast payout they receive after the policy is triggered.
Parametric or index-based coverages can be structured for various exposures, such as windstorms in the Atlantic and Pacific Oceans. Coverage is tied to one or several pre-defined metrics – like windspeed at a customer‘s location of insurable interest – and the customer would receive a pay-out when these thresholds are met. This could protect the customer‘s physical assets or insure against Business Interruption, Contingent Business Interruption, Non-physical damage Business Interruption and any other financial loss.
NatCat events can cause various other financial losses, such as the extra expenses of clean up, emergency phase, early recovery, such as the repair, replacement or restoration of critical infrastructure or key technical equipment, as well as landscaping, beaches, roads and alternative access routes to a property. These or similar expenses following a major natural catastrophe can pile up quickly and restrict a corporate or public entity's cash flow. Additionally, a quick recovery mitigates larger Business Interruption losses and helps customers become operational faster, which could give them a competitive edge. Further, covers for extra expenses could be sublimited in traditional insurance policies or not insured.
Parametric solutions pay within a pre-agreed number of days after an event. In most cases, once policies are triggered, payments are made within 30 days, if not faster.
During the 2019 hurricane season, Swiss Re Corporate Solutions helped customers recover through parametric insurance. For instance, following Hurricane Lorena, we paid a public entity customer in Mexico within 13 business days of receiving the event notice. This parametric wind insurance policy covered the most populated area via an innovative combined cat in a box and circle solution. It was structured to have a staggered payout pattern where payment started at 74 mph. This fast payout feature allows customers to take care of the numerous immediate expenses that follow a major catastrophic event which can make a huge difference in recovery and can secure business continuity. Moreover, customers can prioritize how they use payouts from a parametric solution according to their needs.
With the 2020 hurricane season rapidly approaching, Risk Managers and CFOs should consider how they're protecting their entities, and if the quick payout of a tailored parametric solution could benefit their organizations. Early planning – including discussions around budgeting and structuring parametric add-on covers – could mean getting the protection they need to recover quickly in the event of a natural catastrophe.