Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Swiss Re plans parametric quake cover using USGS ShakeMap data


Global reinsurance giant Swiss Re is planning to launch a new parametric earthquake re/insurance product soon. The new product, dubbed Swiss Re QUAKE, will utilise USGS ShakeMap data to structure triggers that payout rapidly.

New Zealand earthquake damage picture from the GuardianParametric insurance and reinsurance protection is becoming increasingly available, with efforts to sell the product seemingly ramping up and new products being launched all the time.

The use of parametric triggers as a way to offer coverage that pays out rapidly, on the occurrence of specific catastrophe or weather event parameters, is nothing new. But the way the parametric product is thought about, marketed and sold is advancing, which bodes well for uptake.

Swiss Re has been offering parametric insurance and reinsurance solutions for many years, but this soon to be announced Swiss Re QUAKE product sounds interesting as the reinsurer is looking to help clients reduce their basis risk by structuring customised parametric solutions that match assets at risk with trigger design.

Of course, we’d always say that basis risk is less of an issue if a parametric coverage is sold as a contingent source of post-event capital, designed to provide liquidity and enable continuity. That often means selling in a parametric risk transfer product to a CFO or board, rather than to an insurance or reinsurance buyer.

But basis risk is still an issue for re/insurers and even corporates looking to buy parametric risk transfer products, although issues around the way products have been marketed and sold in the past have hindered uptake, and hence efforts to minimise it are welcomed and can help to increase uptake.

Swiss Re QUAKE will take the clients portfolio or assets at risk and the United States Geological Survey (USGS) ShakeMap output to structure and define parametric triggers, as well as define payouts.

The ShakeMap data is not just intensity based either, but also offers data on peak ground acceleration and spectral intensity measurements, both of which can be usefully deployed within triggers to further increase their accuracy and reduce basis risk.

ShakeMap data is available very quickly after an earthquake and raw information on an earthquakes parameters can be downloaded in grid format, allowing a loss to be calculated rapidly and paid quickly if it breaches the parametric trigger.

Swiss Re’s QUAKE product is likely to be structured in such a way that the trigger is weighted appropriately to the clients portfolio or assets at risk, allowing basis risk to be minimised further.

Products such as this can help to narrow one of the most evident insurance and reinsurance protection gaps, the dearth of U.S. and global earthquake coverage.

Large corporates are massively exposed to and under protected from earthquake risks, even in the most developed markets of the world. Parametric earthquake coverage could help to cover more of this risk, helping corporates to take greater responsibility for their economic exposure to quake risks, protection their shareholders, assets, staff and clients better.

Insurance and reinsurance firms are also massively exposed, and often lacking in coverage. Well designed parametric quake risk transfer products could help to narrow that protection gap as well, helping the re/insurance market to offer more effective coverage to its client-base as well, safe in the knowledge reinsurance is available on a customised basis.

Of course, while ShakeMap data is available quickly and from a trusted source such as the USGS, the evolution of technology will one day mean that earthquake sensors will be broadly available and with those a much more accurate and highly customised parametric trigger will be available.

Swiss Re is expected to reveal its latest parametric re/insurance offering Swiss Re QUAKE soon. We’ll update you when we hear more.

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