Legal perspective: Increasing awareness of parametric insurance

The reasons for the low insurance penetration in developing countries include the lack of understanding of and experience with the role that insurance can play in helping individuals and businesses protect themselves against natural and other risks. But at least one reason is the difficulty documenting and administering claims, which is a concern for both the buyer of coverage as well as the insurers. Can parametric insurance provide the solution?

Insurance usually indemnifies the insured party for the loss it incurs from a covered risk or event, and the insured must notify and document the loss to the insurer. In contrast, parametric insurance is based on a model of the loss that the insured will incur in those circumstances. It pays the insured party a pre-determined amount upon one or more triggers being met.

For natural catastrophes, the trigger might be, say, sustained wind speed, rainfall amounts, or the magnitude of an earthquake in a specified geographic area, or at one or more specific locations.

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The source for the trigger is usually specified and tends to be a recognized independent third party (such as a weather or earthquake monitoring body) or bespoke data analysis system.

Traditional indemnity insurance, on the other hand, requires an assessment of the value of the insured’s loss, and the claims handing and loss adjusting process can slow down the release of a claim payment – particularly in a developing country. Also, traditional indemnity insurance customarily has various conditions, exclusions and limitations that may introduce uncertainty and delay for an insured making a claim.

Documentation of losses not required

Parametric insurance does not require the buyer of the coverage to document the losses it has suffered, which makes the payments process faster and simpler. The difficulty, as with most insurance products, has been increasing penetration of such products in developing countries.

NGOs and parametric insurance

Non-governmental organizations (NGOs) play an essential role in assisting catastrophe-hit countries and regions. Despite their best efforts, NGOs themselves typically have to scramble to raise funds following a natural catastrophe, which can create a time lag before help arrives on the scene in force. Every delay on the ground exacerbates the impact of a disaster. While affected areas wait for support and funding, lives are disrupted, businesses and livelihoods are lost, and national output is dented.

One potential solution to reducing this lag and uncertainty is to increase the use of parametric insurance by NGOs. For this to happen, the insurance industry must do more to educate NGOs and governments on the value of parametric coverage.

Given the faster process and speed of payouts under parametric insurance, an NGO with a parametric insurance cover could expect to receive funding quickly after a natural catastrophe to allow it to intervene and provide aid rapidly. Or it could receive funding even before a catastrophe unfolds – for instance, it could receive a payout as soon as the rains fail, enabling it to intervene before a drought leads to a full-blown food crisis.

Encouragingly, such parametric insurance is already being used by governmental entities.

For instance, the parametric catastrophe insurance facility CCRIF SPC (formerly known as the Caribbean Catastrophe Risk Insurance Facility) has paid out $29.2 million to member countries (Barbados, Haiti, Saint Lucia and St. Vincent and the Grenadines) on their parametric policies for claims arising from Hurricane Matthew; what is especially noteworthy is that the payments were made within 14 days after the hurricane. Other examples of such parametric facilities include a parametric weather insurance program in China’s Heilongjiang province and the weather risk pooling mechanism used by the African Risk Capacity which includes parametric triggers.

The advantages of parametric insurance for NGOs are clear, and there are encouraging signs that both the insurance industry and aid community are committed to developing insurance models that connect new products to “on-the-ground” humanitarian and development scenarios. For instance, the Insurance Development Forum (a body backed by the World Bank, UN and key players in the insurance industry) is taking the lead in bringing together the industry to tackle the issue of resilience; meanwhile, the Start Network, a global group of 42 aid agencies committed to changing the humanitarian system, is developing new ways of funding fast, efficient disaster response.

But everyone in the insurance industry ecosystem needs to be proactive in increasing uptake of parametric products by NGOs through comprehensive educational efforts.

The industry also needs to ensure that it understands any barriers that NGOs might face when looking at this type of products – for example, whether donors would be willing to donate towards premium for a parametric cover that might never pay out.

Finally, the industry could do more to increase awareness of the successes parametric insurance has already had in developing countries to show how the insurance industry can play a key part in building greater resilience to natural disasters. By Nigel Brook, a partner at Clyde & Co The Briefs

ILS changes ahead in UK

The UK Treasury has published a consultation paper containing draft legislation for insurance linked securities (ILS) framework for the UK and addressing the proposed corporate, tax and regulatory aspects, reports Holman Fenwick Willan. The regulations would introduce a protected cell company (PCC) regime to cater for multi-arrangement insurance special purpose vehicles, ie insurance special purpose vehicles (ISPVs) which take on multiple contracts for risk transfer. UK PCCs would be private companies limited by shares and would comprise the cells and the core. The proposals have been designed to meet Solvency II requirements by ensuring the assets and liabilities of each cell of the PCC are ring-fenced.

Tougher anti-money laundering rules for the UK

A number of very significant changes are being made to the UK anti-money laundering regime. Lawyers at Hogan Lovells warn companies should track the progress of the Criminal Finances Bill and the proposed amendments to the Fourth Money Laundering Directive so that they can make their views heard and are ready to implement the changes. The UK government has published its new Criminal Finances Bill, which forms part of the Action Plan for anti-money laundering and counter-terrorist finance. It has been through the initial committee stage and will now be considered at the Report Stage and Third Reading.

French anti-corruption rules affect all

Tough new French anti-corruption rules will also affect non-French entities doing business in France. With effect from November 10, 2016, France has adopted the Law on Transparency, the Fight against Corruption and Modernization of Economic Life (known as “Sapin II” after Michel Sapin, minister of finance), report lawyers from Baker & Hostetler LLP. Sapin II is France’s response to international criticism of its perceived hands-off attitude toward anti-corruption enforcement, which has caused the US Department of Justice and other law enforcement and regulatory agencies to seek $1 billion in fines against French companies Alcatel, Alstom, Technip and Total.