Swiss Re proposed that Azerbaijan use parametric triggers for catastrophe insurance, to provide disaster recovery funding, as well as the establishment of a reinsurance pool to help to lower reinsurance coverage costs, at a meeting held in Baku.
Interfax reports that the Swiss reinsurance company advised the Azerbaijan government to consider the use of parametric insurance to help protect the country’s budget against the financial shocks created by natural disasters such as earthquakes, floods and droughts.
The compensation provided by payouts from parametric insurance could be used to help the Azerbaijan government rebuild its infrastructure, as well as provide post-disaster recovery funding to protect the country’s GDP in the event of major disasters.
The Azerbaijan government could enter into parametric insurance agreements directly with the reinsurer, or via an intermediary such as the World Bank, Interfax reports. With Azerbaijan a developing nation with a large oil industry, the use of a MultiCat type parametric catastrophe bond to protect it from earthquake losses is just one possibility.
A longer term proposal put forward by Swiss Re is for the creation of an insurance and reinsurance pool for disaster risks which would allow the country to propose mandatory catastrophe insurance cover for property owners in the country. This will allow insurance penetration to grow and transfer the risk from the state, as it currently stands, to the private sector.
Parametric triggers continue to provide a viable structure for disaster insurance and reinsurance in developing nations where data availability and transparency are not sufficient for other trigger types to be used. For a country like Azerbaijan, where a key industry provides much of the GDP growth, protecting itself against the budget drain caused by natural disasters is key and parametric products could be just the response required.
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