Your Swiss Re Team

Parametric (re)insuranceAn overviewAIIC conference Nassau, 8th November 2018

Nadja Riedwyl, Swiss Re Structurer, Reinsurance

Agenda

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1. Integrated risk management2. Parametric insurance value proposition

a. Mass distributionb. Macroc. Micro-insuranced. facultative risks

3. Take away messages4. Appendix

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Integrated Risk management

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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

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Global Nat Cat protection gap totalled USD 193bn in 2017

Integrated risk management

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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

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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

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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

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Parametric (re)insurance value proposition

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Parametric insurance value proposition

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Close the protection gap

Parametric insurance value proposition

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Fast, flexible and affordable

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Parametric insurance value proposition

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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

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Simplicity drives satisfaction

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Mass distribution

2a

Example: Nat Cat parametric solutions

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Earthquake & Tropical cyclone

Earthquake parametric insurance product

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Quick cash after earthquake to pay for incidental losses and expenses

Tropical cyclone parametric insurance product

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Loss of income covers for high risk areas

Swiss Re Parametric solutions

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A dynamic , easy-to-integrate, modular turnkey solution

Mass distribution roll-out

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Project scope and duration tailored to clients’ needs

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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)

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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)

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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

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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

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Micro insurance

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Solution operation

Event occurs

Remote monitoring

Calcluation platform detects and defines

Insurer identifies clients

and pays

Clients are informed via

SMS

Earthquake shake map

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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

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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

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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

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Take away messages

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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

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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

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Appendix

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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#

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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

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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

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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

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Legal notice

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