Parametric solutions and Private-Public Partnerships: Innovation from Swiss Re

Reto Schnarwiler, Global Head of Swiss Re's Public Sector business, talks to Experts’ Spotlight about the company’s expertise in this sector and the significance of the parametric insurance cover it recently structured for the US state of Alabama.

What makes the Alabama transaction so special?

It’s the first time a government in a high-income country has employed a parametric cover to finance its natural disaster exposure. Swiss Re has already used this methodology to great effect for the Mexican government in a USD 290 million hurricane and earthquake transaction, for Malawi in the form of drought coverage and for the Caribbean Cat Risk Insurance Facility (CCRIF), which provides Caribbean governments with parametric hurricane and flood coverage.

Couldn’t the risk management needs of Alabama's State Insurance Fund have just as well been satisfied with a more conventional insurance solution?

The State Insurance Fund does have a traditional insurance program where Swiss Re has a lead role. But the state also recognized that a parametric solution would provide a powerful complement to this traditional insurance. Parametric protections are especially effective instruments for the public sector because pay-outs can be made in as little as two weeks. Governments’ financial liquidity is consequently maintained, enabling them to focus on disaster response rather than disaster financing. Secondly, parametric solutions can cover risks beyond traditional insurance, for example the cost of a government’s relief or recovery efforts.

What does this deal say about our problem solving expertise? Does Swiss Re have a competitive edge with respect to PPPs, parametric and risk transfer solutions?

Swiss Re has a dedicated team looking after Public Sector entities globally. We understand very well that their needs differ from those of corporates or insurance companies. We are also able to leverage Swiss Re’s formidable expertise and product range to solve their problems. This is a very powerful combination that increasing numbers of Public Sector clients have come to appreciate.

If we are to repeat the Alabama success elsewhere, will the cutbacks in public-sector budgets be a help or a hindrance?

We see tremendous interest from many industrialized countries. This is because while public spending has been reduced, citizens are calling for government to use tax revenues more effectively to reduce budget volatility. In other words, with tighter budgets, governments have less flexibility to absorb risks and are increasingly looking for new approaches to deal with this constraint. Parametric solutions can provide these new approaches

Ultimately, the pressure on budgets will help since increasing numbers of governments see insurance as a risk management tool rather than an expense. In most places on this planet, risks are heightening and we are seeing an upsurge in economic losses from disasters. This applies to the public sector especially, since infrastructure or relief and recovery efforts are often not adequately insured.

Furthermore, we put a price tag on risks. This means that public sector decision-makers can compare the costs of prevention, mitigation and adaptation. So overall, we believe that governments will turn increasingly to the private sector to lay off some of their risks.

Published: 20 August 2010

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