‘Parametric’ Covers Central to Insure Public Entities Says Cooper Gay Exec

Despite the ever increasing severity and frequency of natural catastrophes, “insuring public entities in affected countries is becoming simpler due to the emergence of new parametric trigger insurance” according to Steve Jackson, CEO Latin America of international broker Cooper Gay.

Speaking at last week’s third annual BrokersLink Global Conference in Miami, Jackson told delegates the cost of disaster relief and reconstruction was also rising as a result of these CAT events.

“It’s impossible to escape the news coverage of catastrophic events throughout the world, but the most alarming aspect from a pure economic perspective is recent significant widening of the gap between the economic loss and the insured loss,” he stated. “This is especially prevalent in developing and emerging markets that can ill afford any shortfall. The Haiti earthquake, for example had an economic loss of $6 billion, but an insured loss of only $200 million.”

He also pointed out that the insurance industry can play a key role in narrowing the gap through the development of innovative programs in conjunction with governments and aid bodies such as the World Bank and the Inter-American Development Bank, but there are challenges.

Jackson explained: “We have the global capacity and intellectual ability, the challenges to the insurance industry are the scale of risk and being able understanding and quantify the risk due to a lack of information. A distinct lack of a risk management culture and the difficulties often encountered when dealing a tender process in some regions can also hinder the swift delivery of an effective mechanism.”

He also told delegates that while the implementation of traditional risk transfer and finance mechanisms such as Cat Bonds, contingent lines of credit and structured reinsurance would deliver results, the market should pay close attention to recent developments in the provision of parametric trigger insurance.

Unlike conventional insurance based on the principle of indemnity for actual losses sustained, “parametric covers pay out based on the performance of an agreed and established underlying ‘index’. These indexes can be created, for example, for earthquakes based on intensity and floods based on rainfall amounts or water levels,” the bulletin explained.

“At the cutting edge of parametrics we are also looking at a diverse range of risks for issues such as drought based on a vegetation index created by measuring bio mass via satellites,” Jackson continued. “This is a very exciting area of insurance development and, when combined with more traditional approaches, will enable our industry to provide affordable protection for the public entities that are incredibly important to vulnerable nations in CAT affected regions,” he concluded.

Source: Cooper Gay