Parametric insurance solutions should play larger role in catastrophe coverage says Swiss Re

The parametric insurance coverage triggered by the earthquake in Haiti enables the government to provide accelerated assistance to the survivors.

The suffering in Haiti has been terrible. It is estimated that 200,000 people have perished as a result of the earthquake. Quite apart from the astronomical sums necessary to rebuild the shattered country, the pressing need now is to finance the effort to provide food, shelter and medical treatment. The UN says that over the next few months, this task alone will cost upwards of USD 600 million.

Against this background, the USD 8 million payout from the insurance coverage provided by the Caribbean Catastrophe Risk Insurance facility (CCRIF) to the government of Haiti is not a major sum of money. But this is not the point. The point is that the Haitian catastrophe has highlighted the potential of parametric insurance to help countries plan for and pre-finance natural disasters as part of a comprehensive disaster risk management strategy.

Unlike traditional insurance, parametric instruments use a model to calculate the payout of the insurance policy. This payout model aims to closely mirror the actual damage on the ground and enables a much more rapid payment as no loss adjusters are required after the event to assess the actual damage.

The CCRIF is the world’s first multinational parametric insurance facility and is owned and operated by Caribbean governments. It issues insurance policies directly to the participating governments and aims to limit the financial impact of catastrophic hurricanes and earthquakes through the provision of short-term liquidity. Swiss Re is the co-lead reinsurer of the CCRIF and has a strong commercial and strategic relationship with the CCRIF built on successful business, but also extending to shared goals in the development of the public sector’s approach to ex-ante financing and risk management.

Swiss Re is the global leader in risk transfer transactions with the public sector. Beyond offering risk transfer capacity, it has the expertise to structure specific risk transfer solutions, in particular when these are not based on standard indemnity insurance principles. For the future, Swiss Re is applying its expertise to work on similar facilities, for example with the Inter-American Development Bank for several countries in Central America.

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