Parametric insurance is becoming more mainstream and has become a great tool to complement traditional insurance as the potential devastating impacts of perils like earthquakes increase, Megan Linkin commented in a recent interview with Reinsurance News.
Findings from the latest USGS National Seismic Hazard Model (NSHM) revealed that there is a higher probability of damaging earthquake related ground shaking along the East and West Coasts, when compared with the last NSHM update issued in 2018.
Within the United States, the question is not about ‘if’ but ‘when’ a major earthquake will occur. And insurers are getting ready to support their clients post-event by providing “effective financial protection tools” such as parametric insurance.
The Senior Parametric Nat Cat Structurer, Swiss Re Corporate Solutions, said: “The USGS revealed that there has been increased risk of an earthquake impacting major cities along the East Coast, from Washington to Baltimore, to Philadelphia to New York to Boston. But to put this in context, the risk went from being very low to maybe slightly less low. It’s the West Coast that continues to have the most significant earthquake risk in the US.
“For example, an earthquake striking, either San Francisco or Los Angeles would have significant ramifications not only for the population, businesses, corporations and governments that are located in those immediate cities, but also for the entirety, or possibly all of the US economy. San Francisco is a key Tech Hub and Los Angeles ports are key to the supply chain.
“There are multiple large faults in California, and even though they haven’t produced a major earthquake in a while it’s really not a question of ‘if’ it’s a question of ‘when’. So parametric insurance can help complement any existing insurance coverage that a corporate or government has in place.”,
Parametric insurance uses the characteristics of the underlying event to determine if a payout is due. In the case of earthquake, the earthquake-related ground shaking or earthquake magnitude is used, and the information regarding the earthquake characteristics comes directly from the United States Geological Survery, the government agency responsible for monitoring earthquake activity, Linkin explained.
She continued: “There are many benefits from this approach. Number one, the use of funds is very flexible. It’s not necessarily tied to a particular structure or asset being damaged and that damage being in excess of the deductible for the buyer to get a payout. All they have to do is confirm that they have losses from that earthquake.
“It is also very transparent because the insured and the insurer are not the ones that are coming up with any numbers or intensities to determine if the product paid out. It is done, completely independently and done by a reputable scientific agency.
“Number three, it’s very fast. The proceeds from all parametric insurance claims that we have received have been settled within 30 days in North America. Funds under the terms and conditions of the parametric insurance policy would be delivered pretty much in the weeks after the event occurs.
According to Linkin, all these characteristics help to kickstart recovery and address potential non-physical damage and business interruption, as well as emergency recovery efforts.
Interest in parametric solutions has grown in recent years, and have become more relevant after catastrophic events such as Hurricane Ian show the insurance gaps governments and corporations need to cover.
Linkin noted: “There was a hardening traditional property cat market which meant that some buyers were looking to get additional capacity and worse that they had previously been able to secure from the property cat market and they were looking for alternative ways to do that.
“When hurricanes hit the US in 2020,2021, 2022 and even in 2023 when Hurricane Idalia made landfall, it really opened a lot of corporations and governments eyes to what their uninsured exposure is or what their potential uninsured exposure could be. The losses that would just simply not be covered under their traditional policy has made them look to options that could address those gaps and coverage; and parametric insurance fits those gaps quite well.”
Linkin also highlighted that parametric products have not only become more mainstream but that there is proof of concept that they work successfully.
The executive concluded: “There has been proof that parametric solutions work. There has been an improvement in the data that’s available to settle parametric insurance transactions.The improvement in underlying observational scientific data has really enabled and expanded the field of parametric insurance and I only foresee that in the years to come as well.
“Parametric solutions are becoming more mainstream. Previously they were very niche as they were used by particular segments of buyers, like government clients or energy companies. But now they are becoming more broadly accepted by all insurers who participate in the commercial market space.”
