Parametric products: incubation to market in a few clicks

Risks from natural disasters are rising and pose an even greater challenge to society. The Swiss Re Institute estimates the global insured losses from natural catastrophes in the first half of 2022 are USD 35 billion, 22% above average of past ten years (USD 29 billion).

Despite heightened risk awareness and improved insurance penetration, the natural catastrophe protection gap remains significant. In 2021, total economic losses from natural disasters amounted to USD 270 bn, of which only 41% were insured. While traditional indemnity cover is one form of protection, the loss assessment and claims settlement can take more time. Moreover, traditional insurance doesn't cover all capital needs, such as emergency cash for relocation or Non-Damage Business Interruption (NDBI) costs.

As an alternate solution to narrow the protection gap and supplement where traditional products fall short, parametric insurance is becoming increasingly popular.

Parametric or index-based solution uses a parameter (or index) to trigger payouts after an event. The parameter can be any measurable aspect of a peril, such as the ground shaking intensity, the windspeed of a typhoon, the extent of flooding, or the rainfall intensity. Since claims are triggered immediately on pre-agreed parameters instead of actual losses, it offers much-needed funding to the insureds in a timely manner.

Our typhoon parametric solution designed for China's Guangdong province is a case in point. After typhoon "Mangkhut" landed in Guangdong province in 2018, parametric catastrophe insurance was activated for both Yangjiang and Maoming city.  A one-time compensation of USD 12 million was paid in 3 days to the Municipal Government for emergency response and post-disaster restoration. In the case of traditional insurance, the claims settlement could have taken months for such a big loss event.

While parametric insurance is gathering popularity, a well-designed parametric policy is easier said than done. Insurers who consider offering parametric solutions must determine several critical aspects. What is the most suitable index to represent a peril? What is the probability of the selected index being triggered in a given period? And how to structure a product that fits the insureds' specific needs? Swiss Re recently developed a Parametric Costing Toolbox to answer these questions.

Swiss Re's Parametric costing toolbox leverages the latest information technology to ensure the tool's scalability, reliability and performance. It conducts analysis using the stochastic Nat Cat models we've developed over the past few decades. Designed to be easily integrated into Swiss Re's existing policy administration platform, the new toolbox will enable the automation of parametric product design from costing to post-event loss calculations.

China is one of the countries susceptible to frequent natural disaster events. In 2021, natural catastrophes cost the country RMB 334 billion (USD 50 billion) in economic losses. Earlier this year, Swiss Re customised the parametric costing tool for our Chinese clients and rolled out the platform "Yuzhi", which integrates product design and pricing capabilities, taking into account all the market and regulatory requirements in China.

Supporting Typhoon and Rainfall product design at the moment, “Yuzhi” can create parametric products for pre-defined locations and premium budgets in just a few clicks. Historical as-if payment simulation and product description will also be provided and ready for download.

Cindy Zhang, Swiss Re's Head of Property Underwriting in China, said: "Demand for parametric insurance from Government schemes is growing rapidly in China. By developing the "Yuzhi" platform, we can significantly shorten the product design timeframe and improve the client's purchase experience. The payment structure optimisation function also enables automatic creation of the most suitable product for a client's specific needs. This platform can contribute to China's resilience to natural catastrophes and help narrow the protection gap across the country."

To narrow the protection gap at scale, insurers need to redouble their effort to offer broader and more innovative solutions. The unique features of parametric solutions provide a powerful means to expand insurance penetration and help make our world more resilient. And our platform can make a difference by engineering parametric products with a few clicks. Contact us to learn more.