How a little-known corner of the insurance market brings real benefits for both buyers of protection and investors.

Parametric payout triggers are less well known outside the insurance world than indemnity or industry-loss triggers, but they deserve to be better understood. Because its payouts depend upon natural parameters rather than physical financial damage, parametric insurance enables the transfer of more specific risks, with greater transparency. This complements traditional protection and offers real advantages to buyers, sellers and investors alike.

Executive Summary

  • Parametric insurance triggers lead to a payout when a specific chosen physical or natural parameter, such the magnitude of an earthquake or the wind speed of a hurricane in a defined place, exceeds a certain threshold.
  • These parameters are measured by independent third parties and do not require complex and contentious loss-adjustment assessments.
  • Parametric insurance is therefore well suited to transferring very specific risks in often under-insured regions, with a very high level of transparency and rapid settlement following a trigger event.
  • We believe these characteristics offer real advantages to both buyers of protection and investors in insurance-linked strategy portfolios.

Parametric Insurance is Highly Transparent for Investors and Reliable and Efficient for the Insured Sponsor

Source: Risk Management Solutions. Modeled loss triggers use physical catastrophe characteristics to simulate losses in a vendor catastrophe model. For illustrative purposes only.

Case Study: MultiCat Mexico 2012-1 Catastrophe Bond

This bond was sponsored by Swiss Re for The Fund for Natural Disasters of Mexico (FONDEN). It protected Mexico from earthquakes, Atlantic coast hurricanes and Pacific coast hurricanes through respective Class A, B, and C Notes. The Class B Notes offer a simple, practical example of a parametric trigger.

There are two potential triggering events for these Class B Notes that cover Atlantic coast hurricanes: the occurrence of a hurricane in one of two zones along the coasts of Tamaulipas and Quintana Roo, at a defined central pressure equal to or less than 920 millibars (mb), equivalent to a Category 5 hurricane. Either event would trigger the bond, forgiving FONDEN from returning the original principal amount.

The figure shows the defined Trigger Event Conditions and the geographic zones where a triggering event must occur.

Parametric policies that insure governments, like MultiCat Mexico 2012-1, have also been recently observed in Peru, Colombia, Chile and the Philippines.

Source: Artemis.bm, Standard & Poor’s presale documentation.
The case study discussed does not represent all past investments. It should not be assumed that an investment in the case study listed was or will be profitable. The information supplied about the investment is intended to show investment process and not performance.