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RISK IN CONTEXT

Hurricane Forecast: What’s Your Weakness?

Posted by Chad Wright. April 22, 2019

Hurricane season is around the corner. But good news: According to the Colorado State University’s latest forecast, it’s supposed to be milder than usual.

The bad news? Predictions can be wrong and even a single bad storm can wreak havoc for a business.

For those businesses that end up in the path of a catastrophic weather event, insurance continues to be an essential safety net. But traditional policies are no longer the only solutions. Parametric, or event-based, solutions are gaining traction with companies that want a simpler adjudication process and quicker payout.

Thinking Outside the Box

Parametric solutions cover the probability of a predefined event taking place — for example, winds above 90 miles per hour as measured by the National Oceanic and Atmospheric Administration. Parametric policies also include a predetermined payout mechanism that is triggered when the predefined event’s parameters are met or exceeded.

Importantly for organizations, these index-based policies address a major pain point for buyers of traditional insurance coverage: the lengthy and oftentimes cumbersome adjudication process that can leave organizations in financial limbo. Because a parametric trigger is based on predefined parameters, the adjudication process tends to be relatively seamless.

Let’s take the example of a hotel plummeted by strong winds that leave a wave of destruction. If an event-based solution had been purchased, all it needs to prove is that the wind, as measured by the agreed-upon index, met or exceeded the predefined parameters. It frees up time, during an otherwise frantic period, to focus on rebuilding.

Quick Payouts Help Recovery

A second, related, benefit is that parametric solutions provide quick liquidity following a catastrophic event. Payouts can happen very fast, and the funds can be used for any priority. While many companies will funnel insurance money towards immediate repairs, they can also help employees who are personally affected. For example, when Hurricane Maria devastated Puerto Rico, some pharmaceutical companies were relatively unscathed, thanks to the resilience of their plants. But many workers’ personal properties were devastated. Being able to access funds quickly can give organizations in similar situations the opportunity to provide aid to employees, which can accelerate their return to work and help employers avoid lengthy business interruptions.

Businesses can also invest in areas that are not crucial to their operations but can nevertheless disrupt them. For example, a storm could destroy a resort’s landscaping, which isn’t typically covered by a general property policy. While not essential to the running of the business, landscaping can affect the overall customer experience and thus could deter new bookings and fuel cancellations.

Parametric solutions are in no way a replacement for traditional coverage, but rather a complement. Organizations do not normally require additional information to start the conversation with their insurance professional. But when it comes to providing evidence of a claim, there is certainly less information required.

Despite favorable forecasts, as we enter this year’s hurricane season, organizations have no choice but to take precautions. Alternative solutions like parametrics can be one of them.

If you’re attending RIMS 2019 in Boston, you can learn more about parametrics and alternative risk financing at the Marsh Cafe in Hall C (East Side) of the Boston Convention and Exhibition Center. Visit www.marshatrims.com for more information.

Related to:  Property

Chad Wright

US and Canada Risk Analytics Leader