Parametric Insurance
Parametric Insurance

Parametric Insurance Tool for Earthquake Risk, According to Swiss Re’s Linkin

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Megan Linkin, Senior Parametric Nat Cat Structurer at Swiss Re Corporate Solutions, highlighted the growing importance of parametric insurance in addressing the increasing risks associated with earthquakes. In a recent interview with Reinsurance News, Linkin emphasized that parametric insurance is becoming more mainstream and serves as an effective complement to traditional insurance.

Recent findings from the USGS National Seismic Hazard Model (NSHM) have revealed a higher probability of damaging earthquake-related ground shaking along the East and West Coasts compared to previous assessments. With the inevitability of major earthquakes in the United States, insurers are preparing to support their clients post-event with effective financial protection tools, including parametric insurance.

Parametric Insurance Benefits

Linkin explained, “Parametric insurance can help complement any existing insurance coverage that a corporate or government has in place.” She noted that while earthquake risks have increased, particularly along the East Coast, the West Coast remains the area with the most significant earthquake risk. Cities like San Francisco and Los Angeles are especially vulnerable, with potential ramifications for the entire US economy due to their economic importance.

Parametric insurance operates by using characteristics of the underlying event, such as earthquake magnitude or ground shaking, to determine payouts. The data for these characteristics comes directly from the United States Geological Survey (USGS), ensuring transparency and independence in the payout process.

One of the key benefits of parametric insurance is its flexibility in fund usage. Payouts are not tied to specific damage to assets but are instead based on confirmed losses from the event. Additionally, payouts are fast, typically settled within 30 days in North America, which accelerates recovery efforts and helps address non-physical damage and business interruption.

Interest in parametric solutions has grown significantly in recent years, particularly after catastrophic events like Hurricane Ian highlighted insurance gaps for governments and corporations. Linkin noted that the hardening traditional property cat market has driven buyers to seek additional capacity through alternative means like parametric insurance.

Parametric Solution

She emphasized, “Parametric solutions have become more mainstream, and there is proof that they work successfully.” Improved data availability and advancements in observational scientific data have expanded the field of parametric insurance, making it more widely accepted by insurers participating in the commercial market space.

In conclusion, Linkin expressed confidence in the future of parametric solutions, foreseeing continued growth and adoption as a vital tool for managing earthquake risk and other natural perils.