Simplicity, pre-defined triggers, and fast payouts are some of the key advantages of a parametric approach to extraordinary Nat Cat risks, says chief risk officer, Annacel Natividad
Parametric solutions have gained popularity in recent years due to advancements in technology and the increasing frequency and severity of natural disasters and other catastrophic events.
Annacel Natividad is the chief finance officer and chief risk officer of Philippines-based food and agribusiness Pilmico Foods Corporation, and the incoming chairperson of the Pan-Asia Risk and Insurance Management Association (Parima).
She first employed parametric solutions back in 2016 for Aboitiz Power’s distribution utilities business, when she was the CRO of Aboitiz Equity Ventures.
“We found a good partner in Swiss Re Corporate Solutions, together with our broker Aon, and what appealed was the simplicity of the solution. It was an insurance for an otherwise uninsurable asset class that was a quick, hassle-free loss settlement after the event, enabling prompt restoration of essential services.
”I like to be an open-minded risk manager and I knew that parametric solutions were something new and different and a fit-for-purpose risk transfer solution,” she says.
Natividad says Aboitiz’s distribution utility business directly provides utility services to residential and commercial businesses. This is an essential service that needs to be online continuously.
“At the time, we were self-insuring with limited traditional insurance coverage, and this was an expensive process for us. So we explored parametric solutions.
”It was an insurance for an otherwise uninsurable asset class”
”With our distribution utilities business, we must keep the lights on – quite literally – so we need a solution that supports immediate restoration in the case of damages to our poles and wires,” she says.
“Parametric solutions involve having a predefined trigger for being remunerated for our claims. Sometimes, traditional insurance claims can be like pulling teeth as you engage in a back-and-forth with the surveyor and adjuster. Parametric solutions are predefined.”
Natividad says that if the predefined trigger is an aspect like wind speed, a specific amount of money, for example $25m, will be processed to the company.
This makes parametric solutions more fit-for-purpose when funding the repair of essential utilities.
Other benefits of a parametric approach
“You really learn to understand your exposure when using parametric solutions,” says Natividad.
“The Philippines is an archipelago of different islands. We have distribution utilities situated in Cebu, one in Davao and one in Cotabato.
”We have several wires and poles that cut across franchise areas, so if a typhoon passes through, we must really understand our exposure in these areas. It is an opportunity to better understand your risk.”
”With a parametric solution we have the proceeds in 10 days,”
Natividad says she was also better able to manage her time, as proceeds and claims are paid so quickly compared with traditional insurance. This enabled her and the organisation at-large to focus on its customers instead.
“We could also apply more attention to our restoration activity. We must repair our network after a disaster happens. We could focus on this rather than being in discussions with insurers on claims. With a parametric solution we have the proceeds in 10 days,” she says.
Advice for risk managers
Natividad says that while parametric solutions have gained more popularity in recent years, risk managers should be prepared to face internal hurdles to make their businesses understand the opportunity.
“It took almost a year to convince our board and senior management on using parametric solutions as a risk transfer solution.”
As the approach involves better understanding your risk, data analytics such as looking through historical weather data and forecasting may be required to ensure the risk assessments informing the parametric solutions are accurate.
”Once in place, risk managers can save more time on the claims process and instead focus on more important aspects”
“We performed several simulations in order to visualise how our parametric programme would work. We also talked to many experts. This is not a normal insurance contract and requires different wording.
“However, undertaking this process also provided new insights into our business,” says Natividad.
Other hurdles that risk managers might encounter could be lack of data, technology limitation, understanding and awareness, regulatory and affordability. But these challenges will help enhance the role of risk managers allowing them to be more persistent.
“Once in place, risk managers can save more time on the claims process and instead focus on more important aspects,” she concluded.