Swiss Re backs $350m Guangdong, China parametric disaster insurance

Global reinsurance firm Swiss Re has sealed an agreement with the Chinese province of Guangdong to be the sole reinsurer for a parametric disaster insurance pilot providing $350m of protection against tropical cyclone and excess rainfall for seven prefectures in the region.

The first payout under the new Guangdong parametric disaster insurance cover has already been triggered as well, after super typhoon Haima struck the city of Shanwei. The payout was made in less than a week, further demonstrating the key role that parametric triggers can play in insurance or reinsurance arrangements.

The pilot insurance facility uses parametric triggers based on meteorological data to enable rapid payouts of claims. The pilot was developed in response to the Chinese governments desire to better protect the nation against natural disasters and severe weather.

It’s one of the two largest natural disaster insurance schemes in China’s history, with the new pilot in Guangdong closely following the one for Heilongjiang province announced in early August 2016.

The pilot programme offers insurance cover up to a maximum of $350 million, which Swiss Re said is expected to be adjusted and renewed annually. Rainfall data and tropical cyclone wind speed indices are used to trigger policy claims, ensuring the fast parametric payout. Swiss Re is providing the reinsurance cover to back the payouts.

Martyn Parker, Chairman of Swiss Re Global Partnerships, commented; “Guangdong is an important industrial production centre and highly exposed to natural disasters, particularly typhoon and flood. A major disaster is not just devastating for the lives and livelihoods of local people, but is also likely to affect the longer-term economy of the region. Guangdong’s move to put measures in place before disasters strike has already proven its worth, when super-typhoon Haima triggered a claim. The city of Shanwei has received a payout from the insurance company less than a week after the typhoon struck.”

John Chen, Swiss Re’s Head of Reinsurance China and China Country President, added; “Product innovation based on international experience has enabled the success of the Guangdong case. The strong partnership between the government, PICC, and Swiss Re has been pivotal in delivering this innovative scheme. We hope the Guangdong and Heilongjiang models will also serve to benefit other provinces in China.”

By working alongside governments such as China and securing the role as sole reinsurance firm behind these facilities and pilots, Swiss Re is effectively originating new sources of risk for itself at a time when the market is competitive.

Whether these pilots will eventually go to the open market for reinsurance renewals is unclear at this stage, but as China adds additional parametric insurance pilots the potential for a parametric catastrophe bond to provide it with an efficient way to transfer the risks to capital market investors grows.

Parametric triggers in insurance and reinsurance allow the protected entity, be that re/insurer, government or corporation, to gain certainty over payouts, recover cash quickly when disaster happens and ultimately better manage its risk profile and capital flow.