Natural catastrophes can affect businesses of any size, and parametric insurance can provide solutions for small accounts, too — not just large ones, panellists said at a Canadian Underwriter webinar on Wednesday.
Parametric insurance is a type of index-based insurance policy, meaning a payout is triggered automatically by a set of parameters that underwriters tailor to an insured’s risks.
“Parametric insurance is insurance that pays based on a pre-agreed trigger,” as Youssef Baki, a structurer of innovative risk solutions at Swiss Re Corporate Solutions, explains. “Simply put, if an earthquake event occurs that meets or exceeds that pre-agreed event trigger, we pay the insured an agreed amount of money.”
Parametric coverage comes down to an insured’s risk tolerance, rather than solely the size of their business, says Renee Simms, vice president of insurance corporate at RioCan Real Estate Investment Trust.
Simms gives an example of a time she dealt with real estate investments in the Pacific Northwest earthquake zone.
“The value of our assets in the Pacific Northwest quake zones was approximately 15% of our total insured value [207 properties worth an insured value just shy of $10 billion],” she says. “And the applicable earthquake deductible was 3%. I understood that I needed a program to better manage my earthquake deductible.”
Simms worked with her broker to find an appropriate risk transfer solution before settling on parametric insurance. “Everybody has to understand [their risk appetite], because we all have different balance sheets,” she says. “We certainly have a different market cap.
“It truly comes down to…your risk tolerance, your appetite. We are not all the same. But I recognize that the bigger we become, there are a lot of pain points that come along with it, and we have to be prepared to identify it. So, I don’t think it’s a size thing. I think it’s an individual risk appetite scenario.”
Dominika Malycha, senior vice president and account executive at Aon, says whether or not parametric solutions are appropriate will depend on the complexity of the business. “Even if you’re a small business, but you have this main hub in an area that if it got hit by an earthquake, you could potentially suffer a severe loss and could go out of business.”
Baki says Swiss Re works with small, medium and large-sized businesses to find parametric coverage. “We’ll work on solutions as small as $1 million to $5 million and we’ll go up as high as $50, $60, $70 million. In some cases, even higher.”
The whole concept of parametric insurance is based on data provided to the underwriters, rather than on the size of an insured’s business. “As long as there is good, robust historical data, it can be modeled, it can be priced,” Baki says.
“The United States Geological Survey has great scientific data for earthquake and it’s all publicly available on their website. What we do [with the client] is [that] we agree on a payout table…If the earthquake shakes at a certain intensity at your location, we’re going to pay you X amount of dollars,” he says.
Parametric claim payout can be facilitated relatively quickly — within 30 days. Malycha says the process for pricing and arranging a client’s parametric insurance can also be a swift one.
“It comes down to data integrity, how quickly we could [analyze] what the deductible buydown would look like, and what the impact would be on the financials,” she says.
The benefit of parametric insurance is that it works to complement traditional policies. “The objective is not to replace traditional insurance with parametric insurance, but it’s really looking to blend the two solutions together to achieve a better overall outcome in your risk management framework,” Baki says.
Another benefit is that it can be used however an insured sees fit to use it for any loss resulting from the event.
“There are events that could happen where the assets did okay, but the infrastructure and area around was impacted and the general business activity may have been also badly impacted,” Baki explains. “On one hand, the building may have been fine. But the customers and the tenants may have had a bit more difficulties.”
“We’re giving the insured that liquidity in hand when they need it most in those first few days, weeks and months after the event. That helps them also bridge the gap between the event and the time they get paid on the known indemnity claim,” he adds.