Parametric insurance can help captives with unusual risks
Parametric insurance can offer innovative and straightforward solutions to a variety of risks written by captive insurance companies, the Bermuda Captive Conference was told this week.
Presenting at the Bermuda Captive Conference, Greg Fears, Director & Consulting Actuary, Pinnacle Actuarial Resources, discussed Parametric solutions for Captive Success, Dr. Raveem Ismail, Head of Parametric Underwriting, Africa Specialty Risks spoke on amplifying impact for the protection gap and Tom Johansmeyer, Global Head of Index Classes, Price Forbes Re spoke on hedging geopolitical volatility.
Over the past few years parametric insurance has evolved into the captive space to complement their traditional insurance. With traditional insurance a claim is reported, it’s then verified that insurance covers the claim and there might then be a payout, or a reserve set up.
Parametric insurance, on the other hand, has a pre-defined trigger and payout for a wide variety of scenarios. Captives may consider using parametric risk when capacity for specific events is simply not available through the traditional insurance market. Parametric insurance typically covers events including weather risks, agriculture, transportation, supply chains and civil unrest.
A simple example is travel insurance offered by credit card companies where if a flight is cancelled the card holder receives a pre-determined payout. Weather related parametric programmes are used by entities such as the Caribbean Catastrophe Risk Insurance (CCRI) facility and when hurricane Irma hit several Caribbean islands in 2017 $3.1 million in payouts were made immediately after the hurricane to policy holders.
Ismail discussed the challenges and benefits of offering parametric risks in markets typically uninsured or underinsured, specifically in Africa, such as smallholder farmers who cultivate an acre or less. Once the hurdles of country regulations and other factors are overcome, when events such as drought occur, large numbers of farmers can receive quick compensation to avoid potentially life-changing economic ruin.
Jonhasymer provided examples of political insured losses from civil unrest which has been increasing during the last few years such as the 2019 the riots in Chile which led to $3 billion of industry wide insured loss, the 2020 George Floyd riots in the US, also roughly a $3 billion industry wide insurance loss.
For companies that own a captive, parametric insurance can be used to mitigate the losses from such events. For example, a retailer in a big city may experience days or weeks of losses due to riots and once a parametric insurance policy has been triggered, payouts will start almost immediately.
Parametric insurance is often bespoke in nature and working with the right brokers and insurance companies can provide an additional layer of risk management for captives. Coverage is often straightforward, well defined and payouts are made very quickly without the need to file claims.
While it can be used in developed markets, it is also growing in importance for underserved markets, especially in the developing world and will be an important tool in closing the global protection gap.
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