Parametric (re)insurance An overvie€¦ · • Parametric insurance products make payments based...
Transcript of Parametric (re)insurance An overvie€¦ · • Parametric insurance products make payments based...
Your Swiss Re Team
Parametric (re)insuranceAn overviewAIIC conference Nassau, 8th November 2018
Nadja Riedwyl, Swiss Re Structurer, Reinsurance
Agenda
2
1. Integrated risk management2. Parametric insurance value proposition
a. Mass distributionb. Macroc. Micro-insuranced. facultative risks
3. Take away messages4. Appendix
3
Integrated Risk management
1
IPCC Understanding global warming
http://report.ipcc.ch/sr15/pdf/sr15_spm_final.pdf 4
Trends in intensity & frequency of climate and weather extremes
Nat Cat risks are largely uninsured
5
Global Nat Cat protection gap totalled USD 193bn in 2017
Integrated risk management
6
Strategy for climate change adaptation
Identification QuantificationMitigation/Prevention
Adaptation
(risk transfer)
Risk assessment expertise and risk modelling
Urban planning & regulations:• Land use regulations• Building codes
Physical prevention measures: • Drainage systems• Flood protection measures like dams, retentions systems for
large quantities of water, relief watercourses etc.• Hillside and other stabilization measures
Adaptation measures include:• Ex-ante disaster financing instruments, such as
Reserve funds Creation of efficient catastrophe insurance markets
(regulatory regimes) New financing instruments for the public sector
• Post-disaster emergency relief measures
Available public policy "toolkit": (illustrative)
Investments in research & development
gap
Which risk?
Governments
Who carries the risk?
PoolingInsurance schemes and pools
to increase insurance penetration
MacroRisk transfer solutions
for (sub)sovereigns to cover their direct or indirect costs
MicroSimplified products distributed
via aggregators such as MFIs, NGOs, and corporates
Risk transfer solutions
Businesses, homeowners,
farmers
Public physical assets
Emergency response costs
Foregone revenue
Uninsured private assets
Livelihood assistance
Prot
ectio
n ga
p
Individuals
Integrated risk management
7
Public & private sector – Combined response
https://corporatesolutions.swissre.com/insights/knowledge/what_is_parametric_insurance.html
http://www.swissre.com/reinsurance/insurers/sigma_52016__Strategic_reinsurance_and_insurance_the_increasing_trend_of_customised_solutions.html
Integrated Risk management
From a broader risk management perspective the mix of parametric insurance with traditional (indemnity) insurance has distinct benefits:
Parametric insurance• Fast access to liquidity following a disaster
• Absence of expensive and lengthy loss adjustment processes
• Money for all types of losses (also the "excluded" ones under the indemnity policies)
Traditional (indemnity insurance)• Avoidance of basis risk
The two risk transfer solutions are complementary, and not substituting each other
It’s a smart mix
Traditional (indemnity) insurance
Parametric (index based) insurance
• Premium is paid in return for a promise to cover the actual loss incurred of an incident or named peril
• Payment is made only after an actual loss assessment and investigation, with the goal to put the insured back in the position they were prior to the event
• indemnifying actual loss incurred
• Covers the probability of a predefined event happening
• It is an agreement to make a payment upon the occurrence of a triggering event, and as such is detached of an underlying physical asset or piece of infrastructure
• Always consists of:
• A triggering event
• A pay-out mechanism
8
Geological riskHydrometherological riskEnergy risk
United StatesNational Flood
Insurance Program
Team specialized in risk transfer for government agencies. Pioneer in Emerging Markets
Global presence with government and multilateral bodies. Tailor made solution for our clients.
Innovative risk transfer solutionsIntegrated risk management
9
10
Parametric (re)insurance value proposition
2
Parametric insurance value proposition
11
Close the protection gap
Parametric insurance value proposition
12
Fast, flexible and affordable
12
Parametric insurance value proposition
13
Transparent for the consumer
Insured notifies loss occurred - "An eligible event occurred and damage was suffered"
An independent third party (e.g. USGS and NHC) publishes the intensity of the event
An independent agent can determine the monetary payment based on contractually agreed terms and on the maximum intensity of the hurricane or earthquake
Premium
Calculation agent
Insured InsurerClaims
Reporting agent
Triggers
Natural event
Payment is given depending on the intensity of the covered event
The coverage is activated after the occurrence of a natural event and depends on its severity (e.g. maximum 1 minute sustained wind speed of a hurricane, magnitude of earthquake)
Parametric insurance value proposition
14
Simplicity drives satisfaction
14
15
Mass distribution
2a
Example: Nat Cat parametric solutions
16
Earthquake & Tropical cyclone
Earthquake parametric insurance product
17
Quick cash after earthquake to pay for incidental losses and expenses
Tropical cyclone parametric insurance product
18
Loss of income covers for high risk areas
Swiss Re Parametric solutions
19
A dynamic , easy-to-integrate, modular turnkey solution
Mass distribution roll-out
20
Project scope and duration tailored to clients’ needs
21
Macro
2b
CCRIF SPCParametric TC & EQ insurance
Solution features
• CCRIF SPC offers parametric hurricane and earthquake insurance policies to 20 governments
• The policies provide immediate liquidity to participating governments when affected by events
• Member governments choose how much coverage they need up to an aggregate limit of USD 100m
• Parametric insurance products make payments based on the intensity of an event (modelled loss triggers, e.g. hurricane wind speed, earthquake intensity), and the amount of loss calculated in a pre-agreed model
• Peace of mind: Protection of funds and operational efficiency
• The facility responded to events and made payments
Involved parties
• Reinsurers: Swiss Re and other overseas reinsurers
• Reinsurance program placed by Willis
• Derivative placed by World Bank Treasury
Recent payouts
• 2017: Dominica USD 19.3m (hurricane Maria), Antigua & Barbuda, Anguilla, St. Kitts & Nevis, Turks & Caicos, Haiti and the Bahamas (hurricane Irma) USD 29.6m
• 2016: Nicaragua USD 1.1m (hurricane), USD 500k (earthquake)
• 2010: Haiti USD7.7m (earthquake), Barbados USD 8.5m (hurricane), St. Lucia USD 3.2m (hurricane), St. Vincent & The Grenadines USD 1.1m (hurricane), Anguilla USD 4.2m (hurricane)
22
CCRIF SPCExcess of rainfall
Solution features
• In July 2014, CCRIF SPC added a third peril to their program by offering excess rainfall insurance to their members
• 12 countries purchased the coverage that triggers when the modelled loss exceeds the defined country threshold
• Loses are determined based on 2-3 day rainfall totals and the country exposure values
• Utilizes Kinetic Analysis Corporation’s (KAC) high resolution data that is a compilation of satellite and ground observations
• Deductible for the CCRIF is USD 7m and Swiss Re provides reinsurance with a limit of USD 35m
Involved parties
• Reinsurer: Swiss Re
• Product designed by: CCRIF, KAC and Swiss Re
• Calculation agent: KAC
Payouts to date
• 2018: Barbados USD 5.8m (Oct 2018), Trinidad & Tobago USD 2.5m (Oct 2018)
• 2017: Trinidad & Tobago USD 7m (Oct 2017)
• 2016: Haiti, Barbados: XS wind USD 21.5m and Haiti, Barbados, St. Lucia, St. Vincent & the Grenadines: XS rain USD 8m (Oct 2016), Belize: USD 260k (Aug 2016)
• 2014: Barbados USD 1.2m (Nov 2014), St Kitts and Nevis USD1m (Nov 2014), Anguilla USD 493k (Oct 2014) and USD 559k (Nov 2014)
23
Parametric insurance Coral reefs Mexico
www.businessinsurance.com
Coral reefs of the Mesoamerican barrier, Mexican Caribbean/ SHUTTERSTOCK.COM
• Conservation in coastal areas in Mexico has culminated in a new parametric insurance policy designed to cover hurricane-related damage to coral reefs
• The Nature Conservancy and the State Government of Quintana Roo worked with reinsurer Swiss Re Ltd. to explore the possibility of insuring a natural asset like the Mesoamerican Reef and determined that a parametric insurance policy
• The parametric insurance policy was chosen as the solution for its ability to quickly provide the necessary proceeds for restoration activity
24
25
Microinsurance
2c
Parametric insurance BI El Salvador
http://www.artemis.bm/blog/2018/06/27/micro-starts-parametric-business-interruption-insurance-in-el-salvador/
https://www.microrisk.org/countries-regions/central-america/
• The new product, named Produce Seguro in El Salvador, is a parametric product based on indices of data related to weather and catastrophe events, designed to protect low-income families against natural disasters
• The parametric insurance from MiCRO covers business interruption losses from excessive rainfall, severe drought and earthquakes. It is similar to a product piloted in Guatemala last year that has now been launched nationwide, and MiCRO plans to expand this offering to three additional countries in the next two years, the first being Colombia
• This product launch in El Salvador shows that MiCRO’s solution, the first one offering protection against natural disasters to those who need it most, is replicable, a critical factor to scale up and be able to offer this innovative product sustainably
26
Micro insurance
27
Solution operation
Event occurs
Remote monitoring
Calcluation platform detects and defines
Insurer identifies clients
and pays
Clients are informed via
SMS
Earthquake shake map
28
Example
USGS ShakeMap, M 7.8, Apr 16, 2016
25%
75%50%
100%
Inde
x
Locations
• The calculation platform "reads" the ShakeMap, identifies the impacted locations and assigns them the compensation level based on pre-agreed terms
• All customers in the same location receive the same compensation percentage
Earthquake Shake map
Overview of Microinsurance
29
Coverage Latin America & the Caribbean
Overview of Microinsurance
https://caribbeanbusiness.com/microinsurance-on-the-horizon-for-puerto-rico/30
Regulatory frameworks LatAm & Caribbean
House Bill 1729 :Micro insurance on the horizon for Puerto Rico
31
Facultative Risks(Energy, Agriculture, etc.)
2d
Parametric insurance X-Caret Park Mexico
• The parametric insurance policy is chosen as the solution for its ability to quickly provide the necessary proceeds for restoration activities
• After the occurrence of a hurricane, the resorts or parks may suffer damages not covered by traditional policies, for example damages to golf courses or the beach. In addition, loss of benefits due to cancellations or loss of demand may occur, even when substantial physical harm has not been suffered
• This parametric product is focused on compensating for these coverage deficiencies that traditional policies can not efficiently provide
32
33
Take away messages
3
Take away messages
http://www.swissre.com/reinsurance/insurers/sigma_52016__Strategic_reinsurance_and_insurance_the_increasing_trend_of_customised_solutions.html#
https://corporatesolutions.swissre.com/insights/knowledge/10_myths_about_parametric_insurance.html
34
Relevance of parametric insurance
1 Parametric and conventional indemnity insurance costs cannot be compared like for like, as they do not cover the same thing
3 Parametric and indemnity insurance are a smart mix, complementing each other
5 Parametric insurance solutions exist in a wide range of sizes and guises (mass distribution, macro, micro, facultative/single risks)
2 Parametric or index based insurance solutions are simple and transparent
4 The parametric insurance contract requires an "insurable interest" and a "proof of loss"
6 Nat Cat events are common triggers for parametric insurance solutions, however there are plenty of other triggers and applications
35
Appendix
4
Parametric vs indemnity
https://corporatesolutions.swissre.com/insights/knowledge/what_is_parametric_insurance.html
http://www.swissre.com/reinsurance/insurers/sigma_52016__Strategic_reinsurance_and_insurance_the_increasing_trend_of_customised_solutions.html#
36
Regulatory frameworks LatAm & Caribbean
Parametric Indemnity
PaymentTrigger
Payment triggered by event occurrence exceeding parametric threshold
Payment triggered by actual loss of or damage to a physical asset incurred
Recovery Pre-agreed payment structure based on event parameter or index value
Reimbursement of actual loss sustained
Basis risk Correlation of chosen index, the pay-out, and the loss sustained
Policy conditions, deductibles and exclusions
Claims handling
Transparent, predictable, based on a parameter or index, quick settlement. Pay out can be as quick as within two to four weeks after the event as there is no need for loss adjustment
Complex and based on loss adjuster assessmentThis can take months toseveral years depending on the complexity of the loss
Structure Customized product with high structuring flexibility
Standard products and contract wordings; some customization
• Basis risk is the risk of a mismatch between (a) the amounts dependent on intensities specified under a parametric index insurance program and (b) the actual monetary losses incurred as a result of the underlying insured event
• The risk of such mismatch is symmetric: there can be situations where such specified amounts under a parametric insurance contract exceed actual incurred losses ("over-performance") as well as there can be situations where such specified amounts under a parametric insurance contract fall short of the actual incurred losses ("under-performance")
• While parametric insurance products are designed to minimize the risk of both, under-performance and over-performance, such risk cannot be fully avoided
• Absent any manifest errors or omissions the trigger index reported by the reporting agent and validated by the calculation agent are binding and conclusive; the reported and validated trigger index and the ultimate net loss sustained form the sole determinants of the final payments made under the parametric insurance structure
• An actual over-performance can not occur due to the capping with the actual ultimate net loss sustained; this is to avoid that this cover does not qualify as insurance/reinsurance
• An actual under-performance can occur, i.e. the cover may pay less than the actual ultimate net loss sustained (e.g. too little capacity purchased)
Basis risk
37
Nat Cat pool Mexican state
Solution features
• In July 2015, a Nat Cat Pool for the Mexican States was created offering annual coverage for the first 3 Mexican States- Oaxaca, Colima and Hidalgo, with exponential growth potential
• Insurance pool developed after years of promotion and advocacy alongside the Mexican Government
• Developed by the XFT of the “Win States Initiative”
• It’s main purpose is to provide financial protection to the states to cover the 50% contribution required by the National Fund for Natural Disasters "FONDEN" for the reconstruction of damages suffered by the occurrence of a natural phenomenon
Involved parties
• Insured: State of Oaxaca, State of Colima, State of Hidalgo
• Insurer: Agroasemex (Mexico’s State-Owned Insurer)
• Structurer: Mexico’s Ministry of Finance
• Swiss Re: Lead reinsurer
38
Mexico Multi Cat
Solution features
• Insured perils: Earthquake and hurricane• Payments to be used for immediate emergency relief after a
disaster• Parametric catastrophe bond: USD 315m• Trigger type: Index
• Earthquake: physical trigger (quake magnitude)• Hurricane: physical trigger (barometric pressure)
• Time horizon: October 2012 – November 2015• Renewed cat bond launched through the World Bank’s
MultiCat facility and third cat bond for Mexico• IBRD / Fonden 2017, USD 360m, date of issue August 2017
Involved parties
• Insured: Fund for Natural Disasters (FONDEN) of Mexico• Reinsured: AGROASEMEX S.A.• Arranger: World Bank Treasury• Swiss Re: Co-lead manager and joint book runner up to 2015• Munich Re via Guy Carpenter 2017
Payouts to date
• 2017: USD 150m (Magnitude 8.1 earthquake in the Chiapas region of Mexico)
• 2015: USD 50m after hurricane Patricia
39
40
©2018 Swiss Re. All rights reserved. You are not permitted to create any modifications or derivative works of this presentation or to use it for commercial or other public purposes without the prior written permission of Swiss Re.
The information and opinions contained in the presentation are provided as at the date of the presentation and are subject to change without notice. Although the information used was taken from reliable sources, Swiss Re does not accept any responsibility for the accuracy or comprehensiveness of the details given. All liability for the accuracy and completeness thereof or for any damage or loss resulting from the use of the information contained in this presentation is expressly excluded. Under no circumstances shall Swiss Re or its Group companies be liable for any financial or consequential loss relating to this presentation.
Legal notice
41