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Risk in Context

Alternative Risk Transfer Solutions - Parametrics

Posted by Meena Surtani 05 November 2018

Alternative risk solutions are contracts, structures, or solutions provided by insurance and reinsurance companies that enable firms either to finance or to transfer risk in a non-traditional way.

As risks become more and more complex, insurers have tried to mirror these using innovative structures.

Recently, parametric triggers have been gaining popularity and as such, we have seen more insurers willing to underwrite such structured solutions.  In Asia we have successfully structured placements for weather-related indemnity where such cover is not afforded under the traditional insurance.

What are parametrics?

It is an index-based solution that covers the probability of a predefined event happening rather than indemnifying actual loss incurred.  This solution will have a pre-determined payout mechanism when predefined event parameters are met or exceeded.   Such parameters can range from weather events to epidemics, and are extremely useful in situations where traditional insurance coverage is not available.

For example:

  • S$20 million payout designed to protect a potential loss of income and reduced trade in the event of a haze incident. The trigger for pay-outs is based on Singapore's National Environment Agency (NEA) Pollutant Standard Index (PSI) levels rather than loss or damage to physical assets.
  • US$10 million payout for an earthquake of 6.5 or stronger magnitude within a specific agreed Latitude and Longitude announced by the Japanese Meteorological Agency.
  • US$20 million payout for Phase 3 epidemic for a specific site declared by World Health Organization.

As such, parameters only need to occur, and often no loss needs to be proven.  Parametric triggers are definitely a useful tool, albeit one which requires careful review of extensive data, planning, and set up. 

Except in extreme situations, we do not believe parametric solutions should fully replace traditional insurance – but should be used in conjunction with traditional insurance coverage to cover the gaps which the client may be exposed to.

How can parametrics help our clients?

In September 2018, Typhoon Mangkhut battered the Philippines, HongKong, Macau, and China with insured losses estimated at US$1 billion to US$2 billion.

For the first time in history, all casinos in Macau were closed. In addition, 191 flights on Saturday and Sunday (September 15 and 16) were cancelled to and from Macau International Airport. If you consider the fact that Macau's casino revenue from the previous year was HK$217 billion (US$28 billion), shutting the casinos over the two days translates into significant losses – at least in the millions – for the gaming and leisure industry in Macau.

Given how traditional insurance policies are structured, clients may need to wait 8-12 months before seeing their claims paid out. There is also the arduous process of business interruption calculations, obtaining paperwork to prove losses, and policy wording negotiations to consider. Since not all companies have the luxury of waiting 8-12 months before recouping their losses (for example the cost of 191 flights needing to be rescheduled over a two day period) many clients have asked for alternatives. Fortunately, there are parametric solutions with pre-agreed payouts.

To find out more about how parametric solutions can be deployed as part of your risk management program, please reach out to Darrick Cheung.

Related to:  Marsh Risk Consulting

Meena  Surtani