Climate change drives rise in parametric insurance take-up: Swiss Re

Climate change means the nat cat protection gap will only grow—and parametric risk transfer products are gaining traction as a potential way of closing this gap.

Parametric instance solutions are not only fast, they are very transparent, and they effectively allow the transfer of some risks where traditional risk transfer struggles.

That’s the view of Martin Holz, head of parametric nat cat at Swiss Re Corporate Solutions who, together with Megan Linkin, senior parametric nat cat structurer, spoke to Intelligent Insurer about the world of parametric insurance.

With nearly three decades of specialist parametric experience between them, these experts are confident there’s never been a more pressing time to address the protection gap in nat cat losses—and parametric covers can provide at least part of the solution.

More hurricanes and earthquakes predicted

The 2023 Update of the US National Seismic Hazard Model found there is now a higher probability of an earthquake-related ground-shaking event than previously calculated.

And then there are hurricanes, as Linkin explains: “Our hurricanes are becoming more intense, and while each hurricane is a unique and individual event, we are seeing an increased frequency of hurricanes undergoing what’s known as rapid intensification, which is when wind speeds increase by 35 knots or higher in 24 hours.”

The last few years have brought several of these storms: 2020 featured six or seven of them, many of which went on to make landfall on the US; other examples are hurricanes Laura and Ida in 2021, Ian in 2022 and then Dahlia plus Otis in 2023.

“This is consistent with what we expect from climate change,” Linkin observes. “Regardless of the underlying cause, these rapid intensification events are happening more and more. Governments, corporates, businesses and communities need to prepare for that, and need to understand that a tropical storm might not be a tropical storm in 24 hours any more.”

The wider impact of the sea

Equatorial populations are not the only ones that will be affected. Holz is concerned about the global knock-on effect of climate change due to rising sea levels.

“When hurricanes form, they are simply starting with a higher water level to move onshore,” says Holz. “And that’s going to exacerbate the storm surge even further.”

“We saw that with Hurricane Sandy in the Northeast in 2012. It’s a very clear example of the impact of climate change on the natural hazard landscape.”

Parametric insurance offers protection against secondary perils, such as tornado, hail and wildfires, as well as primary perils. “There’s a fairly clear fingerprint of climate change due to increased excessive heat in wildfire-prone areas and the increased dry conditions in those areas,” Linkin adds.

Improving the data landscape

When it comes to assessing weather and offering tailored solutions to its clients, Swiss Re’s nat cat team are no back-seaters. Its storm product was created by calculating the wind speeds at an insured’s chosen locations, and a parametric hail programme was rolled out by working out the maximum hail size reported at a specific set of locations that the insured wanted to cover.

Each time new calculations are made for an insurer, more statistics are added to the overall data bank, allowing the general data landscape to improve. This in turn helps companies such as Swiss Re improve their product offering.

Compared with traditional insurance, whereby the loss and subsequent payout are assessed after an event, in parametric insurance the payout is pre-agreed upfront, and is paid regardless of the size of the loss. As the data landscape improves, so too does the product offering.

Holz says: “Our goal is to give clients what will best suit their needs: a rapid payout after events they’re going to need money and assistance to recover from.”

This type of insurance model is becoming increasingly appealing as businesses learn to increase their coverage options and receive money for events otherwise ineligible for cover under traditional policies.

“As clients see these policies in action there’s a shift from interest in parametrics to actual take-up,” confirms Linkin. “They see it works; it does deliver the insurance promise as it reads on the tin, and as quickly as we said.”

The advantages of parametric insurance policies are clear, and there are now parametric solutions dedicated to other risks, such as cyber. But a lot of earthquake and wind risk has still not been addressed.

As Linkin puts it: “Obviously, if you’re exposed to earthquakes and hurricanes, think about it before new hot topics such as cyber and the like come up.” In other words, with natural catastrophes on the rise, thinking about parametric insurance for the first time might be a good idea.

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