What are the advantages of parametric cover for nat cat risks?

Traditional insurance models often struggle to provide timely and adequate relief

What are the advantages of parametric cover for nat cat risks?

Catastrophe & Flood

By Nicole Panteloucos

In an era of increasing natural disasters, from hurricanes and earthquakes to floods and wildfires, traditional insurance models often struggle to provide timely and adequate relief.

Enter parametric insurance—a modern solution designed to address the unique challenges posed by natural catastrophe risks.

Unlike conventional insurance, which requires lengthy claims processes and detailed loss assessments, parametric insurance offers a faster, more efficient alternative.

Robert Nusslein (pictured), head of innovative risk solutions at Swiss Re, spoke with Insurance Business on why parametric coverage is an essential tool for managing nat cat risks.

Fast payouts  

Relying on predefined triggers, such as the magnitude of an earthquake or the wind speed of a hurricane, parametric policies ensure swift payouts and financial stability when it is needed most.

“A parametric cover is an index solution that pays out when a physical trigger is met or exceeded,” explained Nusslein.

“Both traditional indemnity insurance and parametric covers are meant to address when things go wrong - it’s just the payout, or the trigger, that is a little bit different with parametric coverage.”

Since parametric insurance payments are pre-set to align with specific triggers, the policy is automatically activated when these triggers occur, enabling much faster payouts and settlement compared to traditional insurance models.

Nusslein illustrated this with an example of parametric cover for wind speed exceedance and said: “There is a payout profile that spells out what percent of a limit is due based on wind speed exceeding [a certain level], so the greater the intensity of the storm the greater the payout.”

“It’s formulaic, so it’s a very streamlined process. Parametric payouts tend to be in 30 days or less,” he added.

Increased flexibility

Nusslein also noted how parametric cover can be used to supplement traditional insurance policies, with the ability to top off heavily sub-limited exposures.

Traditional insurance policies often have sublimits on certain types of exposures, which restrict payouts to a lower amount.

Nusslein pointed out that parametric insurance policies can provide “top off” coverage for these heavily sub-limited exposures.

“The ability to top off heavily sub-limited exposures, such as service interruption, which may be more constrained in the traditional market, makes parametric cover a valuable tool,” added Nusslein.

According to Nusslein, parametric policies can also be used to infill deductibles, assisting in covering portions of losses below the primary deductible amount, offering insureds enhanced flexibility.

“Parametric coverage can provide additional limits on sub-limited risks and offer extra capacity with quick payouts,” he said. “This rapid payout creates essential liquidity for the insured, post-event.”

Reliable data

Parametric coverage offers another significant advantage: the utilization of reliable historical data to ensure accurate pricing models.

According to Nusslein, parametric cover relies on independent data providers employing sophisticated modelling techniques to evaluate risks associated with various natural disasters.

These models may consider factors such as location, weather patterns, and geological data, to estimate the potential impact of a catastrophe on insured properties or assets.

“They’re third-party independent providers. Some of them are public entities like the US Geological Survey, some of them are private entities like Moody’s RMS,” stated Nusslein.

“They’re independent from any influence by the insurer or the insured. So, it’s a trusted, capable source of data for settlement,” he concluded.

What do you think of parametric insurance policies? Leave a comment below with your thoughts.

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