Recent earthquakes trigger parametric payouts in China & Japan

Two recent earthquake events in Asia have triggered payouts under parametric insurance policies, further demonstrating the valuable protection a well-structured parametric trigger can provide.

The parametric covers were backed by global reinsurance companies, we understand, who are often the counterparties to such arrangements given their experience with parametric triggers and structuring effective protection against natural disasters using parametric technology.

The more recent occurrence of a parametric product being triggered and paying out was in the province of Yunnan in south west China.

The Yunnan province was hit by a string of earthquakes on May 21st and 22nd, but it was a magnitude 6.4 that struck the county of Yangbi, Dali Prefecture, that we understand to have been the event that triggered this parametric insurance policy.

Yunnan was one of the pilot regions for China’s development of a catastrophe insurance system and we understand that the provincial government first took out a parametric earthquake insurance policy in 2015, renewing it each year afterwards.

We’re told that this M6.4 earthquake breached the parametric trigger and resulted in a payout of RMB 40 million, approximately US $6.3 million at today’s exchange rate.

We’re told that alongside this payout of the provincial government’s parametric insurance, there have also been payouts under a Dali Prefecture agricultural property insurance scheme, which has so far paid out a little more at US $7 million to policyholders, based on a parametric index trigger being breached.

It’s not clear whether the Yunnan provincial government’s policy supports the agricultural property scheme with reinsurance capacity, but it’s encouraging to see parametric triggers providing benefits at both government and individual levels.

The other parametric payout to come to light recently is an example shared by global reinsurance company Swiss Re, who explained that one of its manufacturing industry clients in Japan received a payout on its parametric earthquake insurance policy after a quake in February.

As we’ve previously explained, the Magnitude 7 earthquake struck the Fukushima region of Japan on February 13th 2021 and was seen as having the potential to cause more than US $1 billion of insurance and reinsurance market losses.

As we later reported, claims paid by Japanese insurers related to this earthquake had reached US $1.26 billion by April.

Swiss Re explained that the manufacturing customer’s goal was to supplement their traditional earthquake insurance and cover deductible expenses, benefiting from a parametric solution’s quick payment and flexibility in how funds can be used.

The parametric insurance structure offered the client a dynamic payout that would increase based on the intensity of shaking, using data from the Japan Meteorological Agency’s (JMA) seismic scale – Shindo.

The Shindo scale runs from 0 to 7, a measurement of local ground shaking intensity and in this case, the payout was based on Shindo level 6- and upwards.

Swiss Re’s client experienced physical damage to its premises and business interruption after February’s earthquake.

The quake triggered the parametric insurance policy and the client qualified for a partial payout, the reinsurer said, with payment received three days after confirmation of the Shindo level by the JMA, which was 44 days after the event.

A spokesperson from Swiss Re’s client commented, “The parametric insurance offered by Swiss Re Corporate Solutions gave us a different perspective to earthquake insurance coverage, given the flexibility it offers. The ease and speed of the payout which was delivered just 3 days after the Shindo level by JMA was confirmed enabled us to resume our business operations quickly. Parametric insurance really delivered on its value.”

A spokesperson from broker Aon added, “Parametric insurance was an innovative solution that our client found attractive as it gave them the ability to supplement their traditional earthquake insurance. From the way the insurance was structured and the speed at which the payout was made, parametric insurance offered the client the agility they needed when the earthquake struck. As a broker, it showed us the benefits of parametric insurance.”

As parametric trigger technology advances, thanks to better data, trigger inputs and the use of more advanced tech, the utility of parametric coverage continues to improve and so more covered events will be reported as use of this responsive form of insurance expands.