#NIBA2020: Parametric Possibilities

At the close of day one of #NIBA2020, delegates heard from Arun Mehta, Senior Structurer within the Innovative Risk Solutions team at Swiss Re Corporation Solutions.

In his presentation, Parametrics and other risk financing options, Mehta defined parametric insurance as being a type of insurance that uses an index to trigger payment immediately after an event such as the shake intensity of an earthquake, windspeed, rainfall or flight delay.

Mehta explained that parametric insurance should be used to complement and supplement traditional insurance, not to replace it.

Mehta asked delegates to think about businesses that use intangible assets, like Uber and Airbnb – both use other people’s assets to make a profit.

He continued with the example of Airbnb, suggesting their assets would be an office and some computers.

“Now, let’s say that office is based in New York. What happens if there’s a large earthquake that occurs in California, which affects Los Angeles and San Francisco? All those buildings and houses that are damaged, couldn’t be rented out, therefore Airbnb’s revenue would be impacted.”

Mehta added that tourism too would be affected, which would again impact Airbnb’s ability to collect a booking fee.

“Now, thinking about the impact on Airbnb’s revenue, would a traditional policy pay out?

“Most likely not, because their assets sitting in New York weren’t impacted by this event that happened in California, but it does directly impact their revenue.”

Mehta said this is a great example of how parametric insurance can plug a gap.

Historically, parametric policies are geared towards weather events, due to the readily available independent third party that verifies these events. In Australia it’s the Bureau of Meteorology explained Mehta.

However, due to the expansion of technology and data, parametric policies could extend beyond weather perils.

Mehta concluded: “Having access to more data, will allow for more parametrics to be created.”

NIBA would like to thank Arun Mehta for his insightful contribution to the 2020 NIBA Virtual Convention.