Corporates gaining confidence in parametric solutions

Martin Hotz, head parametric nat cat, Swiss Re Corporate Solutions , talked to Global Risk Manager about the growing interest in, and availability of, parametric solutions for corporates.

As far as nat cats are concerned, are secondary perils becoming the main concern for corporates?

Martin Hotz: There is no general answer to this question. This very much depends on the corporate – what industry are they in, where do they operate, and where are their suppliers based? To a tech company in the Silicon Valley, earthquake will remain the main concern, while tropical cyclones (including secondary effects such as storm surge or excessive rainfall) remain the main concern for many corporates operating in coastal areas in the US, or the West Pacific. Secondary perils like convective storms are, however, a key concern for many people and corporates as large areas are at risk and the frequency of such events is very high and increasing.

Are corporates (as opposed to insurers) actively taking an interest in parametric insurance?

Martin Hotz: Yes, they are. Parametric insurance has proven to be an effective risk transfer method in recent natural catastrophe events like Hurricane Ian, the Morocco earthquake, or the New Year’s Day earthquake in Japan. Parametric insurance has been tested and the policies were behaving as expected, resulting in many potential customers taking the parametric insurance route with greater confidence.

Can you give any examples of the sort of areas that corporates are looking to use parametric insurance?

Martin Hotz: Corporates are looking to use parametric insurance predominantly to protect themselves against disruptive weather and natural catastrophe events, on all continents. This can be lack of sunshine, wind or rainfall in the context of energy production or agriculture, as well as natural catastrophe risks such as earthquakes, tropical cyclones, convective storms or even volcanic eruptions to protect their financial exposure to these perils.

Which sectors (agriculture, construction, tourism?) are most interested?

Martin Hotz: All sectors – including retail, manufacturing, real estate or the public sector. In fact, all sectors that are exposed to weather and / or natural catastrophe risk, where a fast and transparently responding cover is of value, or where assets that are otherwise deemed difficult to insure are at play, such as certain business interruption costs.

Is parametric insurance generally for very specific areas, with a relatively narrow focus e.g. specific perils / locations?

Martin Hotz: A parametric insurance policy typically provides cover at the intersection of a specified area with a specified named peril. Parametric insurance can, however, also be designed based on non-physical triggers such as footfall or hotel occupancy, or other more general indices that can be reported objectively and that serve as a mutually accepted loss proxy.

Much is made of parametric insurance paying out if the trigger is hit, even if there is no financial loss suffered. But equally, is there a danger that if the trigger is not quite reached then there may be a loss but no payment? Is this where insurance and parametric solutions tie together?

Martin Hotz: Parametric solutions are a form of insurance where the loss is agreed in advance, but proof of loss is required to avoid potential enrichment. We check whether there is an insurable interest, and a financial loss must be confirmed – but there does not need to be physical damage – for example, non-damage business interruption is one of the use cases for parametric insurance. Proof of loss is not required for a derivative contract.

Under a parametric insurance contract, types of loss can also be claimed that cannot be insured under a conventional property damage and business interruption (PDBI) insurance policy – such as business interruption that is not directly related to property damage. In this way, parametric insurance in combination with conventional PDBI insurance can provide more comprehensive protection, as parametric insurance can help cover otherwise uninsured losses.

How does parametric insurance work together with traditional insurance?

Martin Hotz: Parametric insurance can contribute to overall more comprehensive protection by covering otherwise uninsured losses and expenses, address retentions or provide additional capacity. Parametric insurance can also facilitate a complicated PDBI renewal if a hard-to-place risk is carved out from the PDBI cover and protected by a parametric insurance policy instead.

Can parametric insurance work well with captives?

Martin Hotz: Yes. Many risk managers are looking for ways to optimise their self-insured retention, for example through a captive. We offer parametric reinsurance to captives or we front parametric insurance policies for captives. More mature and diversified captives can act as a transformative entity that enables an efficient parametric insurance purchasing process while providing indemnity insurance to its insureds.

Is one of the advantages a lack of disputes over payments (compared to insurance claims), or is there still some potential for disputes?

Martin Hotz: The terms and conditions in a parametric insurance policy are very clear, which should greatly minimise the potential for disputes. A parametric insurance policy is perhaps only a dozen pages long. The cover design (for which we have a global team of specialists), including the specifications of how the loss is pre-agreed, may take a bit longer, but once the policy is issued, the insured benefits from very transparent terms that allow for a very fast claims process – days to weeks, as opposed to months and sometimes years.