Parametric insurance: certainty in uncertain times
Is your risk transfer strategy built for the modern economy?
Article information and share options
Everyone knows that police, firefighters and paramedics are the first to respond in a crisis. But there’s another equally important first responder – a financial first responder – and that’s insurers. For centuries, insurance has helped people, businesses and communities rebuild, in the process making substantial contributions to economic progress and a more resilient society.
There’s a subset of insurance, however, that’s relatively new and built for today’s world. It’s called parametric insurance, and a key part of its value proposition is near-instant liquidity.
The promise of a certain, rapid payout means they can recover faster. Parametric also fills gaps found in traditional indemnity policies – like deductibles, sub-limits and exclusions. In fact, an insured can use the claims proceeds for almost any type of loss not covered by a traditional property damage and business interruption policy.
Who uses parametric insurance? Just about every type of business as well as governments in regions that experience natural catastrophes like hurricanes, earthquakes and hailstorms. Parametric has helped insureds bounce back after hurricanes in Alabama, earthquakes in Japan and hailstorms in Colorado.
The parametric value proposition becomes more compelling as monitoring and measurement of the natural world becomes more precise. Payouts are based on agreed-upon triggers like earthquake ground shaking or wind speed. Policy terms are based on objective, third party data from public agencies or specialized firms. Since the data is incontrovertible, there’s no lengthy negotiation over how much the policyholder is owed.
As our world grows more complex and as natural catastrophes are on the rise, parametric covers are becoming critical to ensuring sustainable economies. There are several reasons:
- Businesses have more intangible assets than ever. While traditional insurance is an effective cover for tangible assets like buildings and their contents, parametric insurance is proving to be an exceptional hedge against loss of intangible assets that are critical to operations. Examples include loss of income during a supply chain disruption, accommodating resort guests following a storm, and dependency on nearby tourist attractions for business.
- Parametric is also indispensable when its necessary to repair or replace certain tangible assets that are often excluded from a traditional policy or not insured to the full limit – for example transmission and distribution lines, golf courses, even landscaping and beaches.
- CFOs like the fact that there’s no carryover from one fiscal year to the next, as parametric payments are made quickly and claims can be closed immediately. The quick access to liquidity through parametric insurance is especially attractive for highly leveraged companies whose ability to refinance after a major natural catastrophe could become challenging
At Swiss Re Corporate Solutions, we want risk managers and their brokers to fully understand the potential gaps in their traditional insurance coverage. We work with them to place a value on those uncovered or excluded tangible assets as well as intangible assets – to estimate the likely financial losses if they were to lose those assets during a natural catastrophe – then we structure parametric coverages that fill these gaps.
The “magic triangle” in parametric insurance is speed, flexibility in how payout can be used and transparency. We like to say there’s no fine print in a parametric policy. The wind blows or the earth shakes, and you collect. That’s a reassuring way to stay viable in these uncertain times.