Article ID: f0125258d238cca44ad43f4ec723885438199833ed67f2481c03f00d5d654faa
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The Insurer news staff had no role in the production of this content. This content is created by the brand marketing unit of The Insurer. Extreme weather events can cause significant economic hardship to impacted organisations. Even when a business does not suffer direct property damage, operational disruptions — especially if they are prolonged — can lead to substantial losses that may not always be fully covered by traditional insurance programs, writes Marsh. And at a time when many insurers are increasingly cautious about the potential impact of climate change on storm activity, securing adequate coverage at rates and terms that align with an organisation’s risk profile can be challenging. This was the situation faced by a hospitality company in Asia. Located in an area prone to destructive storms, the organisation was struggling to renew its property coverage, with insurers requiring a sharp increase in its deductible for tropical cyclones. Senior leaders were uncomfortable with the proposed deductible amount, particularly since the policy was unlikely to respond to non-damage business interruption losses, a critical concern for the organisation. Moreover, the tropical storm season coincides with the company’s busiest periods, meaning that any closures – whether voluntary or mandated by authorities – along with cancellations due to travel discomfort could adversely impact the company’s finances. To address these challenges, the team of specialists within Marsh’s Parametric Center of Excellence proposed a parametric solution in an effort to cover the increased deductible that would also respond to non-damage business interruption (NDBI) losses. Moreover, unlike traditional insurance, parametric coverage does not typically require a lengthy claims process. Instead, payouts may be made relatively quickly, at a time when impacted organisations would need financial stability. The company’s senior leaders recognised this as an important benefit. The team collaborated with the company’s senior leaders to structure a program that would be triggered by a predetermined windspeed or central pressure levels within a defined area surrounding the property. Using multiple triggers from different leading reporting agencies allowed us to minimize basis risk, with the program designed to pay out according to the highest amount calculated by the triggers. Further, the coverage area was designed so the parametric solution should be triggered both if a tropical cyclone caused property damage and also if a storm that was not in the immediate vicinity led to losses resulting from mandated closures of their own premises or surrounding infrastructure that could limit visitor traffic. The program was presented to the market, and the company was able to secure the desired parametric coverage. The parametric solution was put to the test in recent years, when a tropical cyclone caused damage to the grounds and led to NDBI losses. Once the calculation agent confirmed that the solution’s trigger was met, the company determined its losses and our team helped submit the claim to the insurer. Because parametric coverage may not involve a lengthy claims process, the payment amount was confirmed shortly after the tropical cyclone impacted the property. The company did not need to provide the extensive loss details that are normally required from traditional policies, allowing the business to access the payment funds within a month, providing financial stability when it was most needed. Natural catastrophes can result in significant losses that impact an organisation’s bottom line. While traditional forms of insurance are likely to remain the first line of defense for most organisations, custom-built parametric solutions can bridge coverage gaps and potentially improve financial resilience following major loss events. Note that while parametric solutions can provide valuable support, they do not guarantee specific outcomes, including the results of any claims. For more information on how parametric solutions can offer coverage for your most complex risks, contact Marsh’s Parametric Center of Excellence.
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