Florida headquartered primary insurance company Universal Insurance Holdings has added an additional layer of protection against catastrophe losses, in the form of a risk-linked contract which appears to be parametric in nature.
Encouragingly Universal terms the risk-linked catastrophe cover “insurance”, rather than part of its reinsurance program, explaining that the contract “protects its own assets against diminution in value due to catastrophe events.”
We say encouragingly as insurers more typically acquire balance-sheet protection against catastrophe through reinsurance programs, whereas Universal has clearly understood that cover can be purchased as contingent protection for its assets.
The firms recently filed with the SEC 10Q quarterly report explains that separately from its reinsurance arrangements, which we described in some detail just after the mid-year 2016 renewal here, it has purchased “insurance coverage” that would provide it with a payout of $10 million”in the event of certain catastrophe event criteria occurring in Florida in the contract period.”
That certainly sounds like a parametric insurance product, which would pay out based on specific catastrophe event parameters (or criteria) that were recorded.
Universal explains that it would receive the “insurance proceeds”, after the specific catastrophe event criteria had occurred, through a “risk-linked transaction contract” that has cost the firm $900k.
Terming it a risk-linked contract might also suggest that this could be structured a little differently to a traditional insurance contract, perhaps as derivative and potentially collateralized, although we cannot be sure of that at this time.
For insurers in catastrophe prone regions, coverage that pays out on the occurrence of specific event criteria (or parameters) can provide a valuable source of liquidity post-event with the promise of paying out much more rapidly than traditional reinsurance would typically be able.
So the real story here is that Universal is being proactive to protect itself against impactful catastrophe events hitting regions in which it is most exposed, protecting its capital, able to provide much-needed liquidity after disaster strikes and ultimately that protection is to the benefit of its policy and shareholders.