Parametric (NatCat) Products - Andi Vossberg

1. Parametric (NatCat) Products
Andi Vossberg
4th October 2018
Quelle: Verwendung unter Lizenz von Shutterstock.com

2. Agenda
1. What is a parametric trigger and how does a parametric trigger product work?
2. Potential buyers of parametric trigger products
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3. What is a parametric trigger and how does a parametric
trigger product work?
 „Smart trigger“
 „Pay now, argue later-policies“
 traditional indemnity (re)insurance: parametric (re)insurance:
covering a policyholder's actual losses pays out in response to defined triggers
Parametric solutions are increasingly being deployed in the public sector and developing
markets, as well as by corporate clients
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Basics

4.  Quantification of traditional exposure is time-consuming and expensive
 Quick post-event liquidity for rapid repair programmes
 Parametric solutions can also cover risks which are excluded from traditional insurance
 Coverage of secondary losses (e.g., disruption of services, clean-up costs, overtime
expenses, etc.)
An alternative/add-on to traditional products, not a substitute!!
Advantages / Motivation ?
What is a parametric trigger and how does a parametric
trigger product work?
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5. Example of a parametric product
What is a parametric trigger and how does a parametric
trigger product work?
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6. Parametric trigger
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 “Cat(astrophe) in a box”

7. Parametric trigger  “ ”
• Definition of a geographic „box“ (Circle, rectangle, coastline, point …)
• Definition of a parametric trigger
 Gust, wind speed, magnitude, precipitation,…
 Correlating to risk location
 Easy data acquisition
• Modelling of return periods for a certain event occurring „in the box“
• „All kind of losses” can be covered
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Basic Principle

8. Date: August 15, 2007
Magnitude: Mw 7.9
Fault-plane: red oval
Huge damages in the Ica region
Pisco - Peru
Cat-in-a-Box (red rectangle):
• Payout is only based on the
magnitude and the location of
the epicenter (yellow star)
• The energy release of an EQ is
the same along the fault plane
(red and blue oval)
• In case of a fault lane towards
NW (blue oval) Lima would
have suffered huge losses but
no payout
Box
Parametric trigger  “ ”-Peru

9. 9
 Epicenter of triggering earthquake has to be located within the box
 Moment magnitude of triggering earthquake has to be equal to or exceed 6.1
 Payout can be structured uniquely in accordance with clients’ needs and price
expectations, e.g. step-wise payout depending on magnitude:
 Each payout is provided immediately after receipt of an event notice and the
preliminary loss estimate
Threshold Covered event payout percentage
6.1 Mw 30%
6.5 Mw 60%
7.0 Mw 100%
How does it work
Pay-out

10. 10
How does it work
Proof of loss
 Insured has to deliver an ultimate proof of loss within one year
 Proof of loss will cover all costs arising from
 real and personal property (including improvements and betterments) within the
coverage region, including but not limited to property owned, used or intended for use
by the client
 financial damage due to BI, any soft costs, any extra expenses
 Regulator approval to be classified as insurance product

11. • Lower price correlates with higher basis risk !!
 Risk that a policyholder may not recover their true losses from a disaster
• Basis risk should be low and well balanced
 in general trigger products are not suitable to cover all losses/damages
• Payment should be correlated with the degree of damage
• Precise definition of the trigger, to avoid anti-selection and “moral hazard”
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Basis risk /
Challenges

12. OneQuake
Example I: Earthquake near Antalya airport
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1. Scenario:
EQ near AYT,
impacting the airport
severely
2. Two circles:
Inner radius: 30km, magnitude: Mw 6.0 (max depth 40km)
Outer radius: 60km, magnitude: Mw 6.7 (max depth 80km)
3. Payout pattern:
Trigger level I: 100%
Trigger level II: 60%
…of limit of US$ 10m
4. Expected annual loss:
0.24%
 Basis for pricing

13. OneQuake
Example II: Earthquake Istanbul
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1. Scenario:
EQ near Istanbul
2. Two circles:
Inner radius: 30km, magnitude: Mw 6.0 (max depth 40km)
Outer radius: 60km, magnitude: Mw 6.7 (max depth 80km)
3. Payout pattern:
Trigger level I: 100%
Trigger level II: 60%
…of limit of US$ 10m
4. Expected annual loss:
1.52%
 Basis for pricing

14. OneQuake
Example II: Earthquake near Istanbul
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1. Scenario:
EQ near Istanbul
2. Two circles:
Inner radius: 30km, magnitude: Mw 6.0 (max depth 40km)
Outer radius: 60km, magnitude: Mw 6.7 (max depth 80km)
3. Payout pattern:
Trigger level I: 100%
Trigger level II: 60%
…of limit of US$ 10m
4. Expected annual loss:
1.52%
 Basis for pricing

15. • Municipalities/State – to cover infrastructure projects
• Banks
• Tourist industry
• To cover non physical damage losses
• To protect deductible
• …
Where do you see potential for parametric trigger products?
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Potential buyers of parametric trigger products

16. Çok teşekkür ederim
Andi Vossberg
4th October 2018
Quelle: Verwendung unter Lizenz von Shutterstock.com