Swiss Re has today announced that it has inked a historic agreement with the Alabama State Insurance Fund to provide it with three years of parametric insurance cover. This the first parametric cover afforded to a U.S. state government fund.
A parametric insurance solution provides the buyer with cover that will be triggered and payout made based on the physical characteristics of a disaster rather than industry loss levels. This means any claim payment can be used to fund disaster response, increased insurance cost or lost revenue. It also means that payouts can be made much more speedily than one where actual losses have to be calculated prior to compensation being made. This makes it a very attractive solution for government organisations.
This transaction provides the Alabama State Insurance Fund with cover for its primary natural catastrophe risk which is hurricanes. Ben Spillers, Risk Manager, Alabama Department of Finance said: “This transaction marks a milestone for the State of Alabama in identifying and managing key risks. Based simply on the wind speed of a hurricane, we can now receive funds rapidly to cover our immediate costs. Our responsibility to protect the citizens of Alabama led us to work with an industry leader like Swiss Re, who has significant experience working with government entities.”
Raj Singh, Member of Executive Committee and Chief Risk Officer at Swiss Re said: “We are pleased to work with Alabama’s State Insurance Fund to help them with their risk management needs through this first-of-its-kind program. Until now, governments, and ultimately taxpayers, have been left shouldering the burden of paying for emergency expenses and reconstruction well after the disaster has passed. In other countries, we have worked successfully with government bodies to address this exposure. These innovative solutions are applicable to governments of all sizes and can be applied to US states who have an economic exposure to catastrophes – whether they be hurricanes, wildfires, or earthquakes among others.”
We’re unsure of the exact details of this transaction, whether it utilises insurance-linked securities or not, but we will bring you more information if it becomes available. This transaction could herald the way for other U.S. state governments or other countries to utilise this transaction structure as an example of good public-private risk management practice.
Update: Some further details of this transaction have emerged via the National Underwriter Online News Service. The state of Alabama fund will receive payments from Swiss Re for wind losses based on documented wind speed from hurricanes. Payment will occur for Category 3, 4 and 5 hurricanes. Category 3 and 4 hurricanes will pay half the limit of the deal while Category 5 will pay the full limit (said to be $10m). Ben M. Spillers, risk manager for the Alabama Department of Finance, told the National Underwriter Online News Service that the deal was ‘really just a cat bond’ and that if a qualifying hurricane hits the state ‘it’s automatic payout within two weeks’.