This document discusses parametric (NatCat) insurance products. It explains that parametric products use defined triggers like wind speed or rainfall to pay out rather than requiring an assessment of actual losses. This allows for quicker payouts. Parametric products are increasingly used in developing markets and by corporations. The document provides examples of how parametric earthquake products for Turkey could work, defining geographic areas and magnitude thresholds for payout. Potential buyers identified include municipalities, banks, tourism industry, and those wanting coverage of non-physical losses or deductibles.

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