Miami Beach considers parametric triggers to protect tourism revenues

by Artemis on May 25, 2018

The City of Miami Beach in Florida is looking into parametric triggers for insurance solutions to protect its revenue from taxes paid by the tourism industry, in recognition that weather, hurricanes and other crises such as the Zika virus outbreak have all had a significant impact on the City’s ability to make money.

Miami Beach is of course hurricane ground-zero, a location that has about the highest density of insured values that are exposed to cyclonic storms in the world and of course this is also ground-zero for the insurance, reinsurance and insurance-linked securities (ILS) industry as a result.

So you’d think Miami Beach would be well-protected against the dent that a bad hurricane season could have on the City’s revenues?

But just like so many other commercial ventures, Miami Beach City needs coverage that can protect it against the knock-on effect of a drop in tourism, which ultimately lowers the amount of tourism tax revenue the City can collect.

To remedy this, Miami Beach is reportedly looking at parametric insurance solutions, which could provide it with a source of cover that pays out precisely when the weather conditions meet criteria that suggest a dip in tourism would be likely after the event.

Parametric insurance could provide the City a form of business interruption coverage, or loss of earnings protection, paying out when major hurricanes occur as Miami Beach knows that after the event its tourism numbers are likely to drop for some time.

In a recent Miami Herald article John Woodruff, the Chief Financial Officer for the City of Miami Beach, explained that resort tax revenue is a “very large revenue source” for Miami Beach, but that it was almost flat in 2016 and 2017, largely due to the economy, Zika and hurricane Irma.

In a normal year resort tax revenues would be expected to rise by up to 5% and provide a valuable source of finance for infrastructure and other city projects.

So Miami Beach is exploring insurance to protect its resort tax income, which Mayor Dan Gelber explained, “We’re obviously just in the exploratory phase, but it’s interesting and it may be something that provides a measure of confidence and continuity. It’s not unlike the business interruption insurance that is available in the private sector for often the same events. We have a very unique economy so thinking about ways to protect it makes sense.”

The article goes on to explain that the insurance product would depend on parametric triggers, such as wind speed, water level, or if resort tax revenue fell suddenly by a specified amount.

The product could even be designed to protect against another outbreak of a health threat such as Zika, as parametric triggers for pandemic and disease insurance or reinsurance are now becoming increasingly common.

Another area of potential interest for Miami Beach might be in parametric protection against the threat of terror attacks as well, which could also have a significant impact on resort tax revenues.

Parametric insurance coverage for business interruption, contingent business interruption and loss of revenue issues are becoming increasingly common, as a way that businesses, municipalities, cities and governments can secure a source of risk finance that will payout when the criteria occur that they know are likely to hurt their income.

The City of Miami Beach should look to the insurance, reinsurance and ILS market for solutions to their problem, as there are plenty of innovative examples that can show them the way to better protect their resort tax income. These include Florida-based parametric specialists New Paradigm Underwriters and its range of parametric products including hurricane coverage, or the recently launched parametric pandemic insurance from Marsh and Munich Re.

Smart use of parametric triggers  designed to respond precisely when resort tax revenues are down could give Miami Beach much greater certainty in its income and continuity of financing, exactly what the insurance, reinsurance and ILS markets are made for.

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ILS Asia 2018

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