Parametric trigger insurance central to public-private risk transfer

by Artemis on November 1, 2011

Parametric trigger insurance is helping to make insuring public entities simpler despite the increasing severity and frequency of natural disasters in many parts of the world, according to Steve Jackson, CEO Latin America of broker Cooper Gay. Speaking at an event in Miami las week, Jackson highlighted the role parametric triggers can play in public-private risk transfer and insurance of public entities.

“It’s impossible to escape the news coverage of catastrophic events throughout the world, but the most alarming aspect from a pure economic perspective is recent significant widening of the gap between the economic loss and the insured loss. This is especially prevalent in developing and emerging markets that can ill afford any shortfall. The Haiti earthquake, for example had an economic loss of USD 6bn, but an insured loss of only USD 200m,“ Jackson said.

The insurance (and reinsurance) sectors can help to narrow this gap through the development of innovative insurance programmes and working alongside organisations such as the World Bank and Inter-American Development Bank. We’ve been covering many of these innovative programs on Artemis, as our regular readers will be aware, and you can read much of our coverage here or here.

Jackson told delegates at the event that “while the implementation of traditional risk transfer and finance mechanisms such as CAT bonds, contingent lines of credit and structured reinsurance would deliver results, the market should pay close attention to recent developments in the provision of parametric trigger insurance“. Now here we’d like to point out that cat bonds actually use parametric triggers in many cases, have done for quite a while and likewise structured reinsurance contracts can utilise indices and actual measured weather/catastrophe conditions.

The benefit of a parametric trigger insurance cover is the agreed payout on an agreed underlying index (eg. rainfall, hurricane intensity, earthquake shaking etc) which therefore allow for a predictable payout and also allow insurance coverages to be much more easily understood by policyholders in developing nations where insurance can be a new concept.

“At the cutting edge of parametrics we are also looking at a diverse range of risks for issues such as drought based on a vegetation index created by measuring bio mass via satellites (such as this working microinsurance programme in Kenya). This is a very exciting area of insurance development and, when combined with more traditional approaches, will enable our industry to provide affordable protection for the public entities that are incredibly important to vulnerable nations in CAT affected regions,” Jackson concluded.

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