No longer niche: Swiss Re thinks parametric insurance is the future

Parametric insurance is no longer a “nice to have”. Megan Linkin of Swiss Re Corporate Solutions, explains why it is now a critical component of any holistic risk management strategy – and will ultimately transform re/insurance.

The 2023 Central Pacific and Atlantic hurricane season starts in just a few weeks – on June 1, officially. Ahead of the new season, Megan Linkin (pictured), senior parametric nat cat structurer at Swiss Re Corporate Solutions, wants to start a debate. She believes that parametric insurance can help tackle the biggest challenges the industry is facing because of more extreme weather events. And this includes the biggest wind events.

The current projections suggest that an average of 13 named storms and hurricanes will make landfall this year. Some experts argue this season may see lower hurricane activity due to the expected formation of El Niño in the Pacific. But while any predictions relating to hurricanes are fraught with pitfalls, Linkin wants people to remember that “it only takes one event for a season to be memorable”.

Hurricane Andrew in 1992 was a case in point, she says. “It was a relatively quiet year overall in the Atlantic, but Andrew made that season unforgettable.” She stresses that the industry must be prepared for any potential disaster.

But there could be better solutions. In the face of the increasing frequency and severity of extreme weather events, Linkin sees parametric insurance as an attractive alternative risk solution and a “great tool” for businesses and governments to become financially resilient in the aftermath of natural disasters. It can also help address other coverage gaps in their traditional insurance.

The concept is simple: index-based products that automatically trigger pay-outs based on objective data such as wind speed, rainfall, or seismic activity, make the claims process faster and more efficient.

This simplicity, flexibility, and rapid pay out, according to Linkin, makes parametric insurance a natural option for the industry. As the global economy becomes more complex with interconnected supply chains, the use of parametric insurance is likely to become more prevalent in the future.

No longer a ‘niche’

The parametric insurance sector has gained significant traction in the last few years. The market is projected to reach $29.3 billion by 2031. While it was once a niche concept, it has now become an important part of many companies’ risk management strategies.

Linkin emphasises that “it is no longer a challenge but an ongoing education process” to help buyers, decision makers and insureds understand how these products are distinct from what they are familiar with, how they can be leveraged to fill gaps in coverage, and how they operate differently from traditional policies.

“Parametric insurance has moved from a niche, very interesting concept and idea to becoming a more and more broadly accepted key component of any risk management strategy,” Linkin said. “It’s becoming a more ingrained and critical component of risk management strategies.”

There are all kinds of opportunities for parametric insurance, including but not limited to individuals, governments, airports, ports, hospitality, construction, agriculture, energy & power, and cyber risk. One of the most developed examples of parametric insurance available in the market is flood insurance.

According to Linkin, parametric insurance is capable of addressing both direct and indirect physical exposures, filling gaps or exclusions within traditional policies, and covering broader financial exposure that traditional insurance may not necessarily cover.

To create a parametric insurance product for a natural hazard, three critical components are necessary, she explained. The first is a historical dataset or natural catastrophe model to understand the hazard’s risk at the client’s location. Secondly, a reliable data partner is required to determine the event intensity quickly after the event and provide quality controlled, high-resolution data. Lastly, the data collected should be reflective of the metrics required for the parametric insurance product.

Linkin expects that as technology improves, including advancements in artificial intelligence (AI), more perils will be able to be covered through parametric insurance. One example is hail coverage, which was previously challenging due to the lack of sufficient data and technology for many years.

“That is because hail is a very localised and random peril, and the size of hail can vary significantly over a short distance,” she explained.

“But now with the evolution of radar technology and other sorts of observational technology, we are able to utilise high resolution hail footprints that have been developed by reliable partners to the insurance industry to determine site specific hail size, which allows us to then sell buyers parametric hail insurance.

“As the technology and the quality of physical data improve, there will be an ever-increasing list of perils that can be covered on a parametric basis,” she added.

Swiss Re Corporate Solutions offers a range of parametric insurance solutions, including hail, earthquake, and tropical cyclone or hurricane coverage, using CoreLogic, USGS granular Shake Map and Moody's RMS as a third-party data providers. The STORM product provides coverage for tropical cyclones or hurricanes, with pay-outs within 30 days after the event and a policy limit of up to $50 million per event. The pay-outs can be used for various immediate economic needs such as property replacement, repair costs, business expenses, lost revenue, and other disruptions caused by the event.

“We are always open to talking to our clients and helping them understand what their exposure is based on their particular portfolio of assets and natural catastrophes they are exposed to,” says Linkin. “We believe that we are serving a very critical product to address potential coverage gaps in traditional insurance.”

2023 has already seen a surge in the development of innovative parametric insurance solutions. One such example is the first-of-its-kind parametric reinsurance for cyclones launched in Africa, specifically in Mozambique. The cover includes wind speed and rainfall and has been structured in collaboration with the World Bank to provide resilience to the economy and support post-disaster recovery efforts.

On the other hand, Hurricanes Ian and Nicole have made traditional insurers reluctant to offer reinsurance in the highly stressed US property-catastrophe market. As a result, several major players, including FedNat, have gone out of business, leaving a significant coverage gap in the market.

However, this challenging situation has also given rise to an increase in the number of innovative and creative parametric insurance solutions available in the market. London-based parametric insurtech FloodFlash has entered the US market, providing coverage for businesses in the aftermath of hurricane devastation. Additionally, a data science-driven cyber underwriter, Intangic MGA, has launched the “industry’s first” parametric policy for public corporations to recover quickly from the material impact of cyber threats. With backing from AXA XL, this new policy offers a unique solution to the rapidly evolving cyber risks landscape.

The emergence of these new parametric insurance solutions is a clear indication of the industry’s willingness to innovate and adapt in response to the evolving market landscape, as well as provide businesses with alternative risk solutions to better protect against a variety of risks.

For more insights on parametric insurance, watch the full discussion video above.