How Parametric Products Work to Supplement Indemnity Policies: RIMS

Corporate risk managers are buying parametric insurance policies to supplement, not replace, their indemnity-based policies.

The parametric products worked well with customers hit by the 2017 hurricanes, according to Robert Nusslein, head of Swiss Re’s Innovative Risk Solutions Americas, who conducted a whirlwind tour of how they work at the recent RIMS conference.

These index-based policies with their simple terms and pre-defined triggers and payouts can fill in deductibles or gaps left by other coverages. In some cases, they cover risks traditional insurance won’t touch such as business interruption where there is no physical damage (a requirement in traditional BI policies). For example, Nusslein said, a hotel property in an area hit by a hurricane may not be damaged but it may lose business because the surrounding area has been shut down.

The policies specify an amount or amounts that will be paid out if and when there is a triggering event that meets the pre-defined conditions such as wind speed, earthquake shake, storm surge or hurricane category.

Parametrics has come a long way. The policies used to be “cat-in-the-box” contracts focused on the center of a storm. But in the past two years there has been what Nusslein called a “quantum leap” in the technology and they have become much more sophisticated capable of “zeroing-in on more precise locations.”

Perhaps the best benefit is that the insured is guaranteed payment quickly. Swiss Re promises it within 30 days but it often pays sooner. “The wheels of insurance can move slowly,” Nusslein said. But the process moves quickly with parametrics because there is no claims adjuster, no claims process, no deductible, no retention and no long wait as can be the case with indemnity payouts.

The quick payouts allow insureds to get a jumpstart on recovery; they are free to use the payments for direct and indirect loss and/or any loss expenses.

Within a year or other time period, depending on the contract, the insured must certify to the insurer that the loss equaled or exceeded the payout amount and did not result in a windfall.

Typical Terms

A typical Swiss Re parametric windstorm insurance policy has a term of up to three years with per event and aggregate limits for each designated zip code. Most important, each policy identifies the triggering event, such as a first stage trigger of 96-110 mph wind speed and a second state of 111 mph or stronger wind speed. The contract also designates an independent third-party source — which for Swiss Re is HWind Scientific out of RMS— that reports the official wind speed.

The policies can be customized. Nusslein’s example showed a property in Miami (zip code 33125) for which the total payout could be up to $1.75 million. If the recorded wind speed was 96-110 mph, a 50 percent ($875,000) payout would be triggered. If the wind speed met or exceeded 111 mph, the payout would be 100 percent of the limit of $1.75 million. A risk manager can create a separate policy like this for each property, varying the terms and limits as desired. A buyer could do the same for properties in earthquake zones using the earthquake shake intensities by region as determined by USGS on its published maps.

As noted, Swiss Re promises payment within 30 days. Insurance Journal wondered why it even takes that long if everything is automatic? What happens during those 30 days? Nusslein obliged with a detailed answer following the RIMS meeting.

“We do say up to 30 days to give ourselves a little bit of latitude if there are delays along the way. In 2017 hurricane events we paid well in advance of 30 days – 12 to 14 days. Hurricanes are unpredictable. We have to wait until the hurricane dissipates to start our Calculation Agent procedures,” Nusslein explained, noting that Hurricane Harvey lingered over Texas for several days at hurricane strength winds.

Then once the storm dissipates, it takes the data provider RMS HWind several days to develop a preliminary wind footprint, which Nusslein describes as a picture backed up by data of 1 minute maximum sustained winds with a 1km grid resolution. “They need time to pull data from all sources including NHC [National Hurricane Center], hurricane hunter aircraft, Mesonet anemometer networks [environmental monitoring networks designed by scientists at the University of Oklahoma and at Oklahoma State University], the Air Force, other academic data providers, NOAA [National Oceanic and Atmospheric Administration] and NASA [National Aeronautics and Space Administration] satellite imagery and distill all of that robust data to produce the very detailed wind footprint used for settlement.”

It’s important that the process not be rushed and that RMS HWind be allowed suitable time to get the accuracy that both the insurer and insureds need.

Nusslein then expanded further on what happens in the handling of parametric claim.

Once Swiss Re receives the wind footprint data from RMS HWind, it uses the data to write event reports for each affected insured. The data includes the actual maximum 1 minute sustained wind speeds per each insured policy location. Some insureds have a single location and it’s easy. Others have up to 750 locations “which is a bit more of an arduous process.” The event report outlines whether an insured event did occur and what the payout is along with detailed supporting data. Those event reports are sent to the insureds for their review. They review and ask questions if any. Provided there are no questions, Swiss Re then makes a payment, usually with five business days of the event report receipt date.

When there are only a handful of policies, the process is not too difficult or long, but when there are dozens or even hundreds it can take longer and get more complicated, he added.

That is how things go when the process runs smoothly. However, there can be also be interruptions. “One possible interruption to the time frame could be devastated infrastructure,” Nusslein continued. For example, after Maria, Puerto Rico was without power. “We usually wire transfer payments. If the power is down and the local banks do not have emergency backup generators which could be the case, that could present delays.

In short, Nusslein says, “Thirty days is very fast and we usually do better. We don’t want to over promise and under deliver.”